US Dollar And Price Of Oil Directly Linked

| October 17, 2007

Oil Prices reached new highs this week, driven higher by concerns over additional conflicts in the Middle East, and specifically by recent nuclear announcements made by Iran.  Also contributing to the unsettling nature of the market is the saber rattling by Turkey about potential military moves into Iraq.  This news flow is clearly an external factor that will continue to make investors question the stability of oil supplies, and will drive prices higher on news and rumors.

Interestingly I have noticed that very little has been noted in the general financial press about the pricing pressure created by the declining dollar.  Most people don’t realize that the price of oil is measured in US dollars.  Therefore, as the US dollar falls it actually cuts the price of oil to international consumers.

This little fact creates an interesting cycle, as the dollar falls, the price of commodities falls.  This reduces the overall expense to international consumers allowing them to bid up the price of these commodities without actually impacting their own financial situation.

The Fed with its continued rate cut mentality is contributing to this continued cycle.  They are attempting to compensate for the ridiculous bubble in the real estate market by cutting interest rates.  The rate cut is only going to scare away foreign investors who normally buy US securities, as they search for higher returns.  As they flee the country with their investment dollars, they will need to sell more US dollars, further decimating the price.

The US dollar is clearly linked to many of the commodities in the market.  Watch this connection closely, as a bounce in the US dollar could result in a negative move in the commodities.

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Category: Commodities

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