Fed Could Burst Oil's Bubble

cnnmoney.com ^ | April 29, 2008 | David Goldman

[kellynla]

Crude oil prices and the value of the dollar have been marching in different directions for months. But that may shift if the Federal Reserve signals on Wednesday that its rate-cutting campaign has come to a close.

One factor that has sent the dollar down and oil up recently has been the Federal Reserve's months-long round of rate cuts. In an attempt to stimulate the ailing U.S. economy, the central bank has cut rates by three percentage points since September. But the rate cuts are also inflationary, weakening the dollar and sending oil prices higher.

"The weak dollar is a major detriment to the price of oil," said Stephen Schork, publisher of the energy industry newsletter The Schork Report. "It's keeping prices artificially high."

Since this time last year, the dollar has plummeted over 10% against global currencies, and oil has climbed about 80%. As the dollar continues to depreciate in value, investors have bought oil futures as a hedge against inflation.

Also, oil is priced in dollars worldwide, so a falling dollar provides less incentive for oil-exporting countries to increase output, or for foreign consumers to cut back on oil use.

As a result, oil traders will be closely watching the Fed on Wednesday. Though most economists have forecast a quarter of a percentage point cut to its key funds rate, many economists are also predicting the Fed will hint that it will keep rates steady, or even raise rates in future meetings, to protect against inflation.

"All of us are hoping for a 25-point cut with a statement that that's it," said MF Global energy analyst John Kilduff. "Some of us wouldn't mind if there's no cut."

Whispers that the current round of rate cuts is coming to an end may send crude prices lower.

[mjaneangels@aolcom]

“Any time there is a gross imbalance in trade, such as in oil, or any foreign supplied good or service, eventually, as the supply of ‘dollars’ increases, it negatively effects the value of that dollar.
Now, obviously, if you are talking about the trade imbalance between Sri Lanka and the US in shirts. That, being such a small part of the overall market, has a correspondingly small effect. But when you get into the 10’s and hundreds of billions of dollars, then effect is not only measurable, but also painful.

The solution, as I see it is to make the US better at providing its own resources, and making the business climate more favorable then exists in other countries. (can any one say “Fair Tax”?? Yep, I knew you could)”

It needed to be said again.

The question I asked earlier, I was thinking of trade with China. That trade is certainly more significant than Sri Lanka, which is why I was asking.

Of course, you are absolutely correct that we should be using our own resources when it comes to items, like oil, that have a significant impact on our economy.

I am not against all trade by any stretch of the imagination, nor am I always against trade that costs us. I think your idea of trade that is significant has to be looked at again, and when needed, change the way we do trading. I think oil and trade with China both fall into this category.

[airborne]

None of the three stooges (McCain, Clinton, Obama) has any intention of cutting, stopping or remotely slowing federal spending.

If the Congress passed a budget that was, penny for penny, the exact amount as two years ago, the stock market would go through the roof and the economy would take off like a rocket!

So of course that will never happen.

[mysterio]

quit printing money and quit cutting the rates...

That would be a good start.