Tuesday April 12, 2005 - 08:52:21 GMT
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Higher oil prices could boost dollar
Contrary to conventional wisdom, sustained higher oil prices could be a boon for the U.S. dollar, particularly if pundits are wrong and crude oil prices have yet to peak, some analysts say.
Though higher crude prices are a drag on economic growth globally, if economic activity slows too far, it may send investors fleeing to safer havens, they say.
With one perceived haven being dollar-denominated assets, investors may have to buy greenbacks, boosting the currency.
"Rising oil prices make for disappointing (corporate) earnings and a run-to-cover risk," said Joe Quinlan, managing director and chief market strategist at Banc of America Capital Management.
"All we need are one or two major companies to say things are soft and investors will move down the risk curve to safer assets."
In recent years, with paltry returns in stocks and low interest rates worldwide, global investors have taken more risk in their search for yield. They have placed more cash in emerging markets and riskier assets generally.
If higher oil prices weigh on growth, those assets will be the first sold and investors will instead view securities such as U.S. Treasuries as a desirable investment, Quinlan said.
The positive impact of higher oil prices on the dollar could even be two-fold if they increase inflationary pressure.
If oil prices are seen to be inflationary and the Fed raises rates, that is dollar-supportive as the differential (with rates in other countries) widen said the, managing director and senior economist at JPMorgan Asset Management.
Of course, that assumes that the United States, the world's biggest importer of crude oil, is better able to weather the effects of higher crude prices than other major economies.
The raw numbers do not look good. U.S. net imports of crude oil at the end of 2003 were 11.2 million barrels a day, almost double the 6.4 million barrels a day in 1980, according to the U.S. Energy Information Administration.
TODAY'S EARNINGS BUY MORE GAS
However, U.S. households are in fact paying less for gasoline as a percentage of wages than they have at other times, notes Frank Gill, an analyst with IDEAglobal in London.
While average U.S. earnings at $15.95 an hour buy 7.2 gallons of gasoline -- or just half what they bought in February of 1999 -- affordability is still much higher than it was in March 1981, when average hourly earnings of $7.28 bought just 4 gallons of gas, Gill said in a note to clients.
Now, the U.S. economy is growing more quickly than other economies at near 4 percent, compared with 1.5 to 2 percent in the eurozone. That gives it more room to slow before a recession might occur.
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