Phil Anthropy

How Can the Dollar Rally As Oil Soars?

In addition to the dollar nearly holding its own as oil prices increased, it is noteworthy that the dollar has actually strengthened against the yen while weakening against the euro. This would seem to indicate a revival of the yen carry trade, which is somewhat surpising if true, because it would mean that carry traders are betting the dollar will not weaken further.

In terms of dollar strength (or lack of weakness) against rising oil prices, just consider that it recently took 40% more dollars than before to buy oil. Foreigners had to buy (or spend from reserves) 40% more dollars for all oil purchases for delivery outside the U.S. Therefore, hundreds of billions of additional dollars have been bought on the currency markets in order to make payments for the oil. This increased demand artificially bolstered the dollar, in my view.

High oil prices also offset the monetary inflation effect of the "economic stimulus" money recently sent out -- most of which was sucked to buy higher priced gasoline (a product of oil, so the money still goes to OPEC). The dollars received by OPEC, China and Japan, among others, must be coming home to roost, recycled into our treasury bonds, because otherwise the world would be awash in dollars and our interest rates would be sky high.

After observing the unusual fluctuations of oil prices over the past few years -- fluctuations often uncorrelated with expected seasonality or transient demand increases -- it seems difficult to relate them to a single force, whether supply/demand, speculation, or "commoditization" of the dollar. I think all of these play a part, but perhaps there is more to it.

One explanation that seems the pass the "Occam's Razor" test as being simple and covering most of the facts is that oil prices are manipulated on a grand scale to further short-term economic goals of the big players. Right now the goal of the U.S. is to keep interest rates down and save the banks. That could not happen if we had dollar monetary inflation. When oil prices are high and resulting demand for dollars is high, interest rates can remain artificially low.

So, whom shall we blame for high oil prices? Perhaps we should audit our various government and quasi-government entities and see what commodities trades they've been making over the past few months.