De Standaard Online

19-7-07

Zwakke dollar, dure olie

• One casualty of the weakness in credit markets
has been the US dollar. This fell to new lows
against the Euro last week and its trade-weighted
index is back close to its all-time lows – levels
previously reached in early 2005 and in 1995.
• Although the new French President, Nicholas
Sarkozy, has been complaining about the strength
of the Euro, his is a lone voice and governments
and monetary authorities, whether in the US or in
its main competitor countries, seem little
concerned about the value of the dollar.
• The only major currency not rising against the US
dollar is the yen, which languishes around 122 yen
to the dollar.

• The dollar’s weakness is driven primarily by the
huge US trade deficit. This deficit widened to $60
billion in May, and is likely to get larger in the
short-term as a result of higher crude oil prices.
• While it is true that the deficit has shrunk a little
over the last year, that is probably due as much to
the relative weakness in the US economy as it is
to the low level of the dollar. Once the US
economy recovers, so the deficit is likely to widen
again.
• For this reason, the US dollar’s real exchange rate
needs to stay at very low levels for several years if
there is to be any chance of a benign reduction in
the US’s trade imbalance.

• Crude oil prices have risen above $75 a barrel
again – using the Brent measure – and are
approaching the all-time high of $79 reached in
August last year.
• The catalyst for the most recent move was
probably a report from the International Energy
Agency suggesting that world oil demand growth
would remain strong due to the strength of non-
OECD economies, such as China.
• Meanwhile, only OPEC countries appear to have
the capacity to boost production in the short-term,
and it is their ability to control the market again
that is underpinning the rise in prices.

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