Wednesday December 8, 2004 - 21:24:17 GMT
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Forex: Oil In Euros, Eurogroup/ECB Zip It
Oil In Euros, Eurogroup/ECB Zip It
Is it growth concerns driving European monetary officials' to whine publicly about oil and the euro? Or is it inflation concerns driving this squeaky wheel? Maybe it is both. But then again if any of the officials attending Monday's Eurogroup meeting in Brussels had looked at a chart of oil priced in euros, they might have been embarrassed into silence. Well we know oil is down a lot from the October record high above $55 (now around $43, down 22%) and we know what a euro/dollar chart looks like since October (up about 8%). The transmission mechanism from changes in the price of oil to real economic activity is much faster and more direct than that from changes in the price of the euro. Even the inflation-oriented ECB like most central bankers sensed a first round impact from the run up in oil through October was likely to be greater on growth than second round effects on inflation. If not the ECB would have been more sanguine on the rise in the euro and perhaps more clearly signaled a readiness to hike rates from post-war lows. So it follows that a dramatic drop in oil in Q4 and a modest rise in euro/dollar would be exactly what the doctor ordered. Headwinds created by high oil have receded considerably. And inflation impulses from oil are also down, and doubly so (figuratively speaking) with the euro up. So the Euro Zone gets the stimulus effect of a double shot espresso and the euro applies some tightening of monetary conditions at the same time...something that should please ECB inflation hawks. And at a bargain...without having to raise rates. Oil in euros is trading at the lowest level since June. So he squeaky wheels of the Euro Zone technocrats should get little oil from the currency market or Bush administration. I suggest instead that Trichet take some of his hardened euro-reserves and buy his own cheap oil to apply to the wheels. Euro/dollar may play well with the press and people of Europe for failed domestic policies and sluggish economic activity. But it is time to heed Doctor Evil and zip it when it comes to whining about a weak dollar.
David Gilmore
FXA
www.fxa.com
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