The debt crisis in Europe, with the dominating Greece bailout, has likely fueled a rise of the dollar that has regained some value over the last few weeks. Investors have been more inclined to sell their euros in exchange for the seemingly more stable dollar.
However, the U.S. dollar weakened against a major currency basket on Friday as an improvement in risk appetite prompted investors to pare back extreme short positions on the euro on the last business day of February, according to Reuters.
Global stocks and commodities were trading stronger, resulting in the dollar being more exposed to volatility, and thus commodity-linked currencies such as the Australian and New Zealand dollars.
For instance, Australia’s Central Bank Deputy Governor Ric Battellino recently remarked that the current resources book could be the longest running of the past 160 years. As the world’s top raw material producer, Australia is providing the world with a rich source of commodities by exporting iron ore, coal, and gas.
There are, however, suggestions that the traditional inverse relationship between the U.S. dollar and oil whereby the price of oil increases as the U.S. dollar falls, could also be altered according to oil and commodity analysts. Statistics showed that the U.S. economy grew with its GDP measuring 5.9 percent higher in the fourth quarter, higher than the government’s first estimate.
“This will be an interesting year with regard to oil and dollar correlation. On one hand, the value of the greenback is expected to rise as the euro falls. On the other, demand for oil is expected to rise,” said Dheeraj Shahdadpuri, an oil economist based at Dubai International Financial Centre (DIFC), in a statement.
Whereas analysts may not be as confident about the euro’s position in the near future due to the status of the Greek economy’s burden as a member of the European Union, “When sub-prime hit in earnest, insuring against Greek default suddenly became a lot more expensive, the credit default swap spread rising six-fold in eight weeks. The same risk measure is now around 400 basis points, the cost of insuring against Greek default no less than 20 times higher than it was in January 2008,” Bill Hubard, chief economist, MIG Investments, told Emirates Business.
“Default risks are growing in Portugal and Spain too, the eurozone’s fourth biggest economy. The problem is that default dangers in Greece—where 20 billion euros (US$27 billion) of debt falls due in April and May—are making creditors think twice about lending to other cash-strapped governments. Even if Greece avoids defaulting, this crisis means governments everywhere will have to pay more for their finance, which in turn will ‘push up’ borrowing costs for everyone—right across the eurozone and beyond, including in the U.K.,” he said.
In terms of oil, demand is forecasted to continue rising this year by riding on the global economic recovery. Francisco Blanch, global head of Commodities Research with Bank of America Merrill Lynch, linked the rise in oil demand to globalization. “Ultimately, trade is GDP on steroids, as a 1 percent increase in GDP is typically associated with a 2.9 per cent increase in trade, and trade is primarily about arbitraging input cost differentials across regions. In turn, increased trade means increased transportation and increased oil demand,” Blanch wrote in a recent report.
The bottom line for the U.S. dollar is that there might be a brief set back in price but this has made commodities more appealing. The trend could see resources like oil and gold rise in tandem with the U.S. dollar ultimately, but market reports indicate the greenback is set to strengthen as the year progresses.
