To: albyjimc2
One thing to keep in mind is that short term Euro deposits only yield 2.25% at the moment vs. 4.50% for USD. This is a potent force in favor of the dollar in the short run.
Let's say that I am a holder of dollars and I want to buy a barrel of crude for delivery one month from now. I have a choice of contracting with a seller in New York, denominated in Dollars, or a seller in Caracas, denominated in Euro. Let's say that the crude is going to be delivered to Houston, TX in either case.
I check the price of crude in each market. The price on the Caracas exchange is the same as the price on the New York exchange, times the current dollar to Euro exchange rate, say 1.19. I decide to buy the Euro denominated contract.
My motivation is that I worship Castro, while despising George Bush, mom, apple pie, nachos, pizza and everything else American. Therefore, I want to lose my Dollars as soon as possible. I feel that the Dollar can only depreciate vs. the Euro since the USA has no future.
So I immediately sell my dollars and buy Euros in the form of a 1 month CD that will mature when I am ready to pay for my oil, earning interest in the meantime. There's only one problem. As mentioned above, I'm only earning 2.25% on my Euro CD vs. the 4.50% I could earn on my Dollar one. This has the effect of making the Euro denominated oil more expensive than the Dollar denominated oil.
To compensate me, the seller of oil in Caracas will have to price his forward contracts lower (when converted at the spot EUR/USD rate) than the seller in New York.
If the European Central Bank were to raise rates above those of the US Federal Reserve board, the situation would reverse itself. However there is no sign that they will do so any time soon since the US economy is comparatively stronger (less slack) than the European one at the moment.
8 posted on
02/25/2006 3:35:16 AM PST by
hedgie
To: hedgie
George Soros? Is that you?
/wiza gurl....or was I?
35 posted on
02/26/2006 8:57:49 AM PST by
Calpernia
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