There's an old Soviet joke that goes as follows:
Q: what's the difference between a dollar and a rouble?
R: one dollar
Will we soon need to update this as follows?
Q: what's the difference between a dollar and a euro?
R: one euro
or
Q: what's the difference between a dollar and a barrel of oil?
R: a barrel of oil
While we're not quite in such dire straits yet, some interesting symbolic levels have been breached today:
Oil price surges past $80
Crude oil prices jumped to a record high of $80 a barrel on Wednesday, as the market judged this week’s move by the Organisation of the Petroleum Exporting Countries to increase production as "too little, too late".
The jump in oil prices came as other commodities, such as wheat, hit all-time highs at a time when industrialised countries’ central banks are under pressure to hold down interest rates to insulate economic growth from financial turmoil.
Dollar hits record low against euro
The dollar dropped to a record low against the euro on Wednesday as concerns over a US economic slowdown continued to weigh on the beleaguered currency.
The dollar fell to $1.3878 against the euro ... [*now to an all-time low of 1.3915*]
Moe interestingly, the dollar has breached a very important level against all currencies, not just against the euro. The USDX index reached a record low, below the highly symbolic 80 level, which had held both in the 70s and in the early 90S, during previous bouts of weakness of the dollar.
Of course, what's interesting today is that record lows against both the euro and against oil were reached. This suggests a weakness of the dollar as much as any particular strength of the other two.
- oil is strong because oil stocks are seen as low, and because OPEC's decision to increase quotas somewhat was seen as more symbolic than anything else (they are increasing quotas to less than what actual production already is);
- the euro is getting stronger because of expectations of lower interest rates from the Fed at the next meeting, and because of fears of an economic slowdown in the US;
Most analysts suggest that the dollar is not overvalued against the euro (if anything, fundamentals would suggest the opposite). But as the dollar is not allowed (because of the mercantilist policies of Asian and oil exporters) to weaken against most other currencies, it can only go down against freely tradeable currencies, i.e. those of other Western currencies - Australia, Canada, the UK and the euro - which means overshooting against the "fair value" in these currencies. The expectation is that a weakened appetite for the dollar will lead to both lower rates against the above currencies (creating problems for exporters in these countries) and higher interest rates (to keep on attracting the $2.5bn per day the US needs to borrow to sustain its current lifestyle) - draining consumption and investment on both sides of the Atlantic.
Which brings us back to oil. In view of the expected slowdown (or worse) of the US economy, oil prices should be trending down. That they are not shows simply that we are in a new world, where oil prices are driven by exogenous (to us) factors - persistently strong demand growth in emerging and oil producing countries (China, Iran, Saudi Arabia, Russia and India), and constrained global supply (declining Mexico and North Sea, struggling Russia and Saudi Arabia). So despite the strong expectations of lower US and European demand, prices are still going up - or the dollar is going down - which is only compounding the problems, as imports get more expensive (generating more inflation), interest rates will need to go up (further weakening balance sheets and household finances).
And thus you see oil vs dollar index:
:: ::
Earlier Countdown diaries
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
- added to the series after the fact