OPEC’s Take On The Falling Dollar
- Greenspan
Act II clarified questions we were left asking after yesterday’s
testimony–tax hikes or spending cuts? - The
declining dollar has awoken a three-decades-old dilemma–OPEC Action as a
response to receiving or decaying asset. - The trade
balance and its potential impact on the dollar Friday.
Chairman Greenspan took his
testimonial show over to the Senate Thursday and while the text remained the same,
the questions were more subdued. The similarity between the two Q and A’s was
the constant battering Greenie got about slow job growth and the budget deficit.
He did make it clear that he was not in favor of a tax hike to resolve the
budget imbalance but favored strict enforcement of curbs on spending.
The Chairman felt it was necessary to return to
the Budget Enactment Act of the 1990s that expired because of the onset of large
budget surpluses. While he doesn’t advocate tax increases, he maintains that
failure to rein in the large deficits will be problematic in the near future. If
foreign investors refrain from supporting our spendthrift ways, interest rates
will rise and the correction will be painful. As the commercial says, “Pay me
now or pay me later.” Otherwise, the market response to today’s testimony was
muted at best.
This week brought a surprise
announcement from OPEC that they agreed on a production cut. Oil prices are
historically high and therefore most pundits have been anticipating a production
increase or at the least a maintenance of the current production schedule. A
production cutback was not anticipated–so the obvious question is why?
Throughout OPEC’s history, it has always maintained an aggressive attitude
toward its product and its value in terms of the dollar. When the U.S. Policy
was dollar depreciation under Richard Nixon, we got the oil embargo of 1973.
Although the embargo was tied to the Yom Kippur War, many political economists
believed that the price hike was a response to the declining dollar.
As the
dollar eroded further throughout the 1970s and inflation surged, Western
consumers were hit with another dramatic price hike with the advent of the
1980s. This hike was ostensibly reported to be a response to the Iranian
Revolution but the price hikes and a weak dollar seem to be too coincidental.
As the dollar stabilized or rallied, the forced hikes eventually eased and the
markets settled down into a range.
Well, here it is, 2004 and with the U.S.
finally ensconced militarily in the Mideast oil region, a declining dollar and
no geopolitical upprising, OPEC cuts oil production to boost price. Just a way
of saying that you will not leave us holding the bag. As long as oil and other
world commodities are priced in dollars, anytime that producers have some market
power, they will react to their economic loss to raising prices. This is OPEC’s
most recent warning to the U.S. about the policy of a declining asset. The OPEC
nations are letting it be known that they are unhappy with the policy of “benign
neglect” and the dollar. Will the U.S. respond or will the OPEC nations
ramp up
their rhetoric about being paid in a basket of currencies? This has great
potential for disruption to the currency markets so be prepared if more threats
arise.
As a currency trader for 27
years, I have seen the impact of the merchandise trade number deemed the most
important economic statistic to being rendered virtually meaningless. The
market is currently ambivalent about most trade numbers but Friday takes on
a renewed importance. With the vast improvement in last month’s data, the
market will be anticipating if a trend is developing or last month was a one-off
event. The consensus estimate is for a $39.8 billion deficit with last
month’s coming in at $38 billion. A number below $36 billion
would be viewed as bullish for the dollar, while anything above $41 billion
would be deemed bearish. If the declining dollar is to have a positive effect
on the trade balance, it should begin showing soon. If not, the trend in the
dollar will continue on its downward path.
Good trading,
Yra Harris