Mar 13, 2008 11:05 pm US/Central
Good Question: How Does Weak Dollar Make Oil Rise?
(WCCO)
Read any story about the skyrocketing price of a barrel of oil, and you'll see a mention of the falling value of the U.S. dollar. What does that have to do with anything?
Considering the top three exporters of oil to the U.S. are Canada, Saudi Arabia and Mexico, you might expect oil to be priced in the currency of those countries.
"Remember, oil, which is a global commodity, is priced in dollars," said Chris Farrell, chief financial correspondent for American Public Media and host of "Sound Money" on public television.
The U.S. dollar doesn't buy what it used to overseas. One year ago, one Euro cost $1.32; today it costs $1.55.
The same devaluation of the dollar has happened with the Japanese Yen. One year ago, you could buy 100 Yen for $0.86; today it would cost $1.00.
"Think of the dollar as another commodity," said Farrell. "It's worth less. Therefore you're gonna try and charge more to make up for the decline of its value."
"Right now the global capital markets are down on the U.S., they're down on the U.S. They're looking at inflation, the mortgage problems and all the credit problems," he said.
So many overseas investors are looking for other places to put money. Some are investing in the Euro and the Yen, which is leading to their rise and the dollar's fall. Others are looking for commodities, like oil, wheat and gold.
For the first time ever, gold crossed the $1,000 an ounce level. One year ago gold cost $650 per ounce.
The global markets are operating on the fundamentals of the economy, but according to Farrell, they also operate on a psychological level.
"They're a voting machine. And they vote whether or not they believe in the value of this currency. What we're dealing with right now is we're right on the edge where the international capital markets are saying, 'We don't trust this currency anymore, we don't think it should be the world's currency,'" said Farrell.
Is the falling dollar the biggest factor in the price of a barrel of oil?
"Absolutely not. No you can't. It's one factor. It's a contributing factor," said Farrell.
He believes the fundamentals are the main factor: the growth of China and India's economy and demand for oil are creating a tight supply. And that always causes higher prices.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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