Friday, August 08, 2008

Dollar Gains, Euro Shrinks, Oil Plummets

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I'm not quite ready to concede that the oil bubble has burst--especially with Russia and Georgia in a shooting war--but things are pointing in a better direction:

If the trend continues into September at anything like the same rate of descent, most of the inflationary spike of the past 12 months will miraculously have been sliced away. This is a dramatic reversal, and it is worth trying to work out why it is happening and what it means.

Just possibly, it means that what investors refer to in shorthand as the great "oil up" story has finally revealed itself not as the fundamental reflection of scarce supply that its adherents liked to claim, but as a simple, speculative bubble that was always going to burst.
Falling oil would help out some hurting sectors of our economy--namely construction and the airlines.

As expected, plummeting oil means a hard-hit Euro and increasing dollar:

Europe's shared currency declined 1.9 percent to $1.5031 at 11:42 a.m. in New York and reached $1.5005, the lowest level since Feb. 27, from $1.5325 yesterday. It fell as much as 2.08 percent, the biggest one-day drop since Sept. 6, 2000. Against the yen, the European currency traded at 165.51, from 167.70. The dollar rose 0.5 percent to 110.07 yen after touching 110.08, the strongest since Jan. 10.

...Crude oil, metal and crop prices fell as the dollar climbed, reducing the appeal of commodities as a currency hedge. Oil has declined to $116.11 a barrel since touching the record of 147.27 on July 11.
Almost unanimously good news for the US except the possible effect it may have on Europeans traveling to America for vacations. This is anecdotal of course, but the strong Euro allowed many more Europeans to go to Orlando, FL when I visited in December than I'd seen on previous visits and they all said it was because of the exchange rate.

Perhaps we might beat this downturn without actually going into a recession.

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