- The Washington Times - Saturday, August 9, 2008

Investors who were bearish Thursday turned suddenly bullish Friday, driving up the dollar and sending oil futures sharply lower on the growing realization that the economies of Europe and Japan are in worse shape than the U.S.

Light, sweet crude for September delivery plunged $4.82 to $115.20 on the New York Mercantile Exchange on expectations of declining demand. The euro fell more than 2 percent to $1.5005, the largest one-day slide in nearly eight years.

As the dollar rocketed and oil plummeted, U.S. stocks took off. The Dow Jones Industrial Average surged 302 points on Friday, erasing Thursday’s 224-point decline.

“Crude was a safe haven at a time of declining stocks and a declining dollar, and now the dollar is going back up, so people are less interested in a safe haven,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass.

“Increasingly gloomy” economic reports out of Europe and Asia have also put downward pressure on the price of oil, which officially entered bear-market territory Friday after declining more than 20 percent from its July peak of $147 per barrel, Mr. Lynch said.

“We are now seeing a lot more negative surprises coming out of Europe than from the U.S., more so than at any time during this credit shock,” which began a year ago, said Jim McCormick, head of currency strategy at Lehman Brothers Holdings Inc.

European retail sales declined in June by the most in at least 13 years. Data released earlier in the week indicated that the German economy had declined 1 percent during the second quarter. Forecasters expect the British economy will likely contract during the third quarter.

“There is a high possibility that the Japanese economy has entered a recession,” the head of business statistics at the Cabinet Office said Wednesday in Tokyo. China also appears headed for a period of slower growth.

By comparison, the U.S. economy, boosted by more than $100 billion in tax rebates, grew a relatively robust 1.9 percent during the second quarter. But many economists expect the American economy to decelerate in the current quarter as that stimulus wears off. Revised statistics issued late last month revealed the U.S. economy actually declined by 0.2 percent during the fourth quarter and increased a paltry 0.9 percent during the January-March period.

The global economic slowdown has dampened demand for commodities in recent weeks. “There are worries about the economic situation with expectations of flat demand,” said Gerrit Zambo, an oil trader in Munich.

In addition to oil, the prices for corn and soybeans have hit the skids. Copper is down. Gold hit a three-month low on Friday. The Reuters/Jefferies CRB Index, which includes 19 raw materials, has declined 18 percent from its record level in early July.

On Friday, the day after European Central Bank President Jean-Claude Trichet warned that economic growth in Europe would be “particularly weak” through the third quarter, the euro slid the most in one day against the dollar in nearly eight years.

The dollar recorded its biggest weekly gain against the euro since January 2005. Since peaking at $1.63 several weeks ago, the euro has declined to $1.50 but has a long way to go to give up all the gains it has made since 2002, when the dollar began its six-year swoon. A euro cost about 85 cents that year.

The dollar on Friday also reached its highest level for the year against the Japanese yen.

With the dollar rising and commodities plunging, the Dow Jones Industrial Average surged 302.89 points (2.6 percent) Friday, carving out a 3.6 percent gain for the week. The tech-heavy Nasdaq jumped 2.5 percent Friday, capping a weekly gain of 4.5 percent. The broad-based S&P; 500 jumped 2.4 percent of Friday and gained 2.6 percent for the week.

The price of oil has now fallen $32 per barrel from its July 11 peak of $147. AAA, the nation’s largest motorist organization, reported that the average price of regular gasoline at the pump declined 1.3 cents on Friday to $3.836 per gallon. The price of gasoline peaked at $4.114 in mid-July, and AAA expects it to fall further as the recent big declines in crude prices work their way through the delivery system.

The big retreat in commodity prices is welcome news at the Federal Reserve, which has found itself running out of options in recent months. Having reduced its targeted short-term interest rate from 5.25 percent last September to 2 percent in late April, the Fed seemed to have run out of ammunition as the economy slowed down. Meanwhile, consumer price inflation had reached 5 percent in June, the highest 12-month rate since 1991.

The European Central Bank’s short-term interest rate is 4.25 percent, considerably higher than the Fed’s 2 percent rate. Until recently, that difference had been putting downward pressure on the dollar. Markets expected the ECB to raise its interest rate later this year, but Mr. Trichet signaled Thursday that an increase was unlikely in the face of a deteriorating economy.

That was all currency traders needed to send the dollar surging Friday, with U.S. stocks rallying close behind.



Click to Read More

Click to Hide