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Is bad news for the world good news for the dollar …

by Brad Setser
July 20, 2006

I have long been puzzled by the notion that the currency of a country with a 6% of GDP trade deficit and a 7% of GDP (maybe a bit less in q1 … ) constitutes a “safe haven.”   Safe havens are supposed to have rock solid financials.  And it is pretty clear to all but the true believers in dark matter that the US dollar has to depreciate (particularly against the currencies of the emerging world, not a relic index like the DX) at some point to reduce the US trade deficit.   

I suspect Bankim Chadha and Jens Nystedt of Deutschebank (full disclosure: Jens is a friend from my DC days) are also puzzled. 

They decided to test the proposition that the dollar is a safe haven during times of stress (no link because it DB prop content).   They defined stress as equity market volatility.  Obviously, there are other potential definitions of stress.   

But the logic behind testing for a correlation with equity market volatility is pretty straight forward.   Equity markets tend to be correlated, and the US equity market tends to be less volatile than most. 

It turns out that there is a correlation between equity volatility and dollar moves (on the Fed’s index) in the daily data – at least over the past ten years.    That makes intuitive sense to me.    The big fall in dollar (02-04) came during a period when equity market volatility was generally declining.  And the big rise in the dollar (95-02) came during period when there was a fair amount of volatility.

But Chadha and Nystedt didn’t stop there.  They looked further back – way back.  And they discovered this effect is a rather recent phenomenon.   During past periods of adjustment, equity volatility wasn’t good for the dollar …  

They expect things will change going forward.  The correlations that accompanied the period where the US trade and current account deficit were growing shouldn’t be projected out.  Different correlations may come to the fore when conditions differ.

That is interesting, at least to me.  Maybe because it is consistent with a lot of my thinking.   I have long worried that there will be a break in the tendency for US interest rates (long-term ones) to fall when US growth slows.    

Why – because in the past, US investors dominated the bond market.  But now, a very large share of US treasuries are held abroad.  That already seems to be changing sold old rules of thumb.  After all, the recent period of strong growth hasn’t pushed rates up – certainly not ex post real rates.  Nominal rates have drifted up, but still aren’t that much higher than backward looking CPI inflation.    That does cause the US any pain.   But the US should at least worry about the possibility that a slowdown that leads the fed to push short-term rates down would generate fears of dollar weakness that would lead America’s foreign creditors to demand higher rates on their long-term debt.  Things that generally were true when foreign savings were  small relative to the US market may not prove true in the new age.

But predicting changes is hard – and predicting the timing of changes is even harder. 

A related question – one for another time – are high oil prices good or bad for the dollar.  I can see both sides of the argument.

35 Comments

  • Posted by isaac

    Chada’s research on Dollar & safe haven is insightful, Stephen Jen of Morgan stanley argued otherwise that hegemonic dollar warrants safe haven status( he was so impressed when Saddam was caught, he had 700k greenback on hand rather than swiss franc, euro or other paper).

    I wonder too how much latest correlation between VIX & dollar index simply reflect market position unwinding, if dollar is widely shorted or used as funding vs. emerging asset, commodities , when risk aversion rose, whether due to geopolitical risk or uncertainty regarding FED tightening, unwinding of position will push dollar up.

    pick another popular safe haven currency, swiss franc ( both AUD/CHF, CHF/USD) in times of high risk aversion as measured by VIX, not suprisingly swiss franc rallied against Australian dollar( growth & risk proxy), but most of time Swiss also rallied against US dollar.

    As for oil price, I guess really depends on driver of oil price:

    if it is more secular growth /demand story, risk aversion is low, dollar dropped as oil & other commodities risky asset rose, this is pretty much dominant paradigm in last 3 years.

    if it is risk of supply shock, geopolitical risk? dollar might rally as global risk averion surge

  • Posted by PC

    You wrote:
    “That is interesting, at least to me. Maybe because it is consistent with a lot of my thinking. I have long worried that there will be a break in the tendency for US interest rates (long-term ones) to fall when US growth slows.”

    Right now, US T-Note and German Bunds have both carved out a bottom and are rallying. Treasurys and Bunds are anticipating economic slowdown (recession?) and an end to the Fed rate hike. Your “tendency” has not broken down. At least not yet.

    You wrote:
    “Why – because in the past, US investors dominated the bond market. But now, a very large share of US treasuries are held abroad. That already seems to be changing sold old rules of thumb. After all, the recent period of strong growth hasn’t pushed rates up – certainly not ex post real rates. Nominal rates have drifted up, but still aren’t that much higher than backward looking CPI inflation. That does cause the US any pain. But the US should at least worry about the possibility that a slowdown that leads the fed to push short-term rates down would generate fears of dollar weakness that would lead America’s foreign creditors to demand higher rates on their long-term debt. Things that generally were true when foreign savings were small relative to the US market may not prove true in the new age.”

    Maybe the time to consider this scenario is when the market has turned fully bullish on Treasurys and is anticipating the Fed to cut interest rates due to economic slowdown or recession. The conventional view is Fed cut rates and Treasurys rally.

    However, remember the conventional view back in 2004 was Fed raising rates was negative for Treasurys? Thus was borned the Conundrum when Treasurys rallied instead.

    Can we have Conundrum II this time when bonds actually decline when Fed cut interest rates? That’s what makes markets fascinating.

    You wrote:
    “A related question – one for another time – are high oil prices good or bad for the dollar. I can see both sides of the argument.”

    For “me”, I go crazy and totally confused if I approach markets like this. You can ALWAYS think of agruments on both sides and this just leads to confusion and paralysis. There is a far far easier way, just focus on the price action (both short and long term) of “each” market “independently”.

  • Posted by MrBill

    RE safe haven status

    It is important not to look at the knee jerk reaction, but also the longer term effect of global volatility as it effects emerging markets.

    The first reaction is too sell local instruments and close open positions. More liquid positions may have to be closed first. Less liquid positions may have to remain open for lack of bids. Even those may be the more vulnerable positions to leave open.

    Only then, once the positions are closed and the cash is safely parked on the sidelines, can you think about reinvesting. Likely in those liquid emerging markets where you (reluctantly) closed out your positions because you could not close your more vulnerable positions due to liquidity problems. Especially if you had margin calls on borrowed funds.

    For example, during the most recent meltdown in emerging markets in June, my balance sheet shrunk by $500 million even as I had to make another $100 million in margin calls, when Russian equities retraced by 30-35% on the back of a fall in Turkey, Argentina, S. Africa, Brazil, etc. Collateral damage despite better fundamentals in Russia.

    However, as soon as the dust settled, money flowed immediately back into Russia and equity prices clawed back a substantial proportion of their losses. I think in this respect, the flight to safety was very temporary and was not because the US dollar is safe, just more safe than emerging markets were at the time? I think the asset class is still effected by cross-over investor sentiment, which does not reflect the fundamentals or each market, but investor sentiment overall?

  • Posted by a

    “But the US should at least worry about the possibility that a slowdown that leads the fed to push short-term rates down would generate fears of dollar weakness that would lead America’s foreign creditors to demand higher rates on their long-term debt.”

    Surely if that is the scenario, the U.S. will simply reduce the term of any new or rolled-over debt.

    Is the U.S. a safe haven? Well where would *you* put your money? Japan? BOJ looks like it wants 100 as the absolute floor vs dollar, so you don’t risk much by keeping your money in dollars. The Euro? European politicians started jawboning when the dollar approached 1.30 vs euro; at 1.50 they’re liable to change the rules for nominating the central bankers at the ECB if the ECB doesn’t lower its rates as well. Really, *where* would you put your money? It’s looks like the only real “safe haven” is commodities; but there’s only so much gold you want to stuff under the mattress.

  • Posted by Charlie

    Brad,
    I think you’re looking at this the wrong way. During times of trouble, investors park their money in USD. They don’t really invest it. The main reason interest rates have remained low in the US, despite our enormous deficits, is much of the money invested in the US isn’t seeking maximum return. Foreign central banks are trying to keep their currencies from appreciating. Many others are looking for a safe place to park money. I know, in theory, USD doesn’t appear safe, but in reality it is. The world will not let the USD collapse under any circumstances. Remember the USD isn’t just the currency of the US, it’s the currency of China, Japan, Saudi Arabia and every other country that pegs or pseudo pegs to USD. Their currencies are backed by USD reserves.

  • Posted by Guest

    re: “depends on driver”

    true for all pricing and the underlying factors driving the sentiment.

    re: “cross-over investor sentiment” – and portfolio/ index trading?

    wouldn’t uncertainties about fundamentals and the ways correlations are changing be another core sentiment driver? Russia looks promising, but there’s a memory problem along with some negative press about legal issues and external relations.

    Japan’s dependency on imported food has to affect its vulnerability to energy prices.

    As long as the USD is more safe, won’t it be the dominant safe haven? Is money flowing back into emerging markets a sign that emerging markets are now a bit safer than the USD – or just another surge into more speculative positions?

  • Posted by kz

    I swear I don’t know why I always comment twice. Sorry.

  • Posted by MrBill

    “re: “cross-over investor sentiment” – and portfolio/ index trading?

    wouldn’t uncertainties about fundamentals and the ways correlations are changing be another core sentiment driver? Russia looks promising, but there’s a memory problem along with some negative press about legal issues and external relations.”

    Really, I do not even think it is that scientific, just the trader who trades Russia also trades other emerging markets, so he has his pile of cash to invest, if he makes money, he gets a bonus, if not, he loses his job, so when one market goes down, he takes cover on all his positions.

    Risk management and control also play their role, as if they are getting margin calls in some emerging markets, they might signal no new lending against any non-core markets and further reduce open positions. This ironically may go against a trader’s instinct to buy low when everyone else is selling?

    I agree with the comment above about parking assets in dollars, not investing in dollars during times of stress especially.

    Or as Cool Hand Luke might have said, “sometimes no position is the best position to have.”

  • Posted by kz

    My take on the next FOMC meeting on August 8th:

    When Capacity Utilization at 82.4%, the highest in the last 6 years, PPI came out at 0.5% MoM and Core CPI at 0.3% for four consecutive months this week came out this week, the market felt that another hike is imminent.

    Then spoke Bernanke, for the first time emphasizing “the anticipated moderation in economic growth now seems to be underway” strongly hinting the possibility of a pause. In the next few hours, DJIA skyrocketed 212.9 points.

    The market is expecting about 65% on another hike on August 8th. But most banks, broker dealers and economists are much more on the “another hike” side. Most of the people with experience know that Fed chairman will take the rising inflation as more a priority than the slowing down economic growth.

    Next week, there are Employment Cost Index, Personal Consumption and GDP Growth of teh second Quarter to be announced. The mortgage rate is at the highest in 6 years and the decline in the real estate industry is everywhere. But I still believe in another hike, and maybe some more even after. Until THAT PAUSE comes, the decline of the USD and the US Treasuries as the last resort is unlikely, I believe.

  • Posted by DF

    IF a US recession means a world recession, then world long term rates may fall if the US growth falls, hence, the US long term rate may fall in par with the rest of the world long term rates.

    A world depression deflation by debt scenario states that US long term rates will fall, because emergent countries will experience very severe deflation (having refused to see there currency rise, they experience price drops).

    If the deflation in Asia is stronger than in the USA, then the dollar may not need to fall and adjustment will occur in real terms.

    Does anyone know if UK in the 30′s experienced a serious deflation and how strong its deflation was relative the one experienced by its main partners USA, Germany, France, and how moved their relatice currencies (OK that’s a bit too much asking).

    AS far as I remember USA had most of the deflation, as I think China will have most of the deflation.

  • Posted by Guest

    Think of parking and safe haven as one and the same – a place to stash cash while sizing up the next speculative play.

    Wasn’t inferring that drivers are all that scientific – only, as Mr. Bill goes on to say, that the drivers are constantly evolving, along with the products and people who are in the business of extracting profits and fees from the markets.

    Perhaps the legal, political and accounting uncertainties are the bigger drivers of pure emotion. Thinking about oil and food, noticed one of the latest installments to this story, which just doesn’t want to go away: “NORTH American farmers are claiming $1 billion in damages from AWB, alleging the Australian wheat exporter used bribery and other corrupt activities to corner grain markets…” http://www.news.com.au/story/0,10117,19753083-37435,00.html

    Thought Samuelson’s federal budget commentary in yesterday’s WP was one of the better ones.

  • Posted by bsetser

    Nice discussion.

    I tend to share the view of those who argue that energy efficiency (and the ability to export energy saving tech/ export to the middle east) should be good for germany and japan — but, hey, I am a dollar bear. I also tend to think those commodity currencies now pegged to the dollar will at some point be forced to adjust upwards … but so far, that hasn’t happened. that is why i am not trader — PC and his charts beat me every time ;).

    Parking assets in dollars (cash) during times of stress — even if not “investing” in dollar assets — is dollar supportive. that seems to have been the dominant theme during “stressful” periods over the past few months. At least that is my sense from afar.

  • Posted by Guest

    Not sure if religion can be added to the sentiment drivers, but interesting to be integrating with a belief system that advocates the “eradication of fractional reserve banking”: http://www.theproblemwithinterest.com/

  • Posted by Guest

    Traders might regard most forms of investment as parking. Investors are unlikely to commit money to a long term position without good reasons to believe it is safe. And the vast majority of positions that might qualify as ‘investments’ are still denominated in USD. (?)

  • Posted by MrBill

    Living with the vagaries of the market is not the same as liking the buggary by the market, and that is the difference between my trading and long-term investing. Have a great weekend. I am fresh out of ideas and that first beer is calling, calling my name and who am I to deny? Cheers.

  • Posted by psh

    Take it from Hezbollah, you don’t everybody just hide in the same hole, you scatter. Frinstance you could readily (but let em toot their own horn) do this: CAD 19% / SGD 17% / SEK 11% / EUR 9% / KRW 8% / NOK 6% / USD 5% / THB 4% / AUD 4% / IDR 4% / DKR 4% … A (varying) split like this gets you an extra percent, historically (lots more, lately), even with higher volatility you come out ahead risk-adjusted. Cheap to do with forward contracts. Sometimes currency risk’s not just risk, it’s drift, and sometimes, drift goes up.

  • Posted by RiSK

    Maybe Chadha and Nystedt’s paper addresses this, but can you tell whether the volatility is tied to the dollar vs. where the Fed is at in their cycle? 02-04 is not only $ weakness but Fed looseness. 95-02 is not only $ strength but Fed tightness (and maybe even more importantly uncertainty).

    If you look at the correlation between Fed tightness/looseness and equity volatility from 84-06, you see more equity volatility coming into and at Fed peaks and the most volatility when Fed movements have back and forth movements in close succession. (Precisely, about 10% more volatile coming into peaks, 10% less volatile coming into troughs, and 25% more volatile when the Fed is dancing up and down)

    Maybe it’s a bit of a chicken and the egg causality though.

  • Posted by RiSK

    Maybe Chadha and Nystedt’s paper addresses this, but can you tell wh

  • Posted by HZ

    MrBill,

    Your argument makes little sense. Oil is a very small portion of Chinese energy supply. Your overall energy/gdp has little to do with oil efficiency and does not answer the original poster’s question (which was on oil). Chinese car fleet (main user of oil) probably has better mpg average than US with smaller and newer cars (on average). It is true a taxi cab driver produces a lot less GDP on the same passenger miles than US, but that just points to the absurdity of the efficiency measure you are using. To put it this way: oil is used mainly for transportation so a poorer country (with lower transportation prices) automatically get less GDP/oil no matter how efficient they are.

  • Posted by Guest

    thought Tarek el Diwany might generate a response from psh. Picked up the reference to his work in last Friday’s FT, ‘How the banks are subverting Islam’s ban on usury’

  • Posted by Guest

    We may be spending more time thinking about soft commodities:

    “…In the US, wheat futures in Kansas, Chicago and Minneapolis are up between 22 and almost 30 per cent so far this year… The US Department of Agriculture is expected to announce next month that global wheat stocks have fallen to their lowest level relative to the rate of consumption since records began in 1978. The USDA, which is considered the world’s most authoritative forecaster, is expected to forecast global wheat stockpiles will drop below 130m tonnes by the end of the year to June next year from a current estimate of 133m. The 130m tonnes would be the lowest tonnage in storage since 1982…” http://www.ft.com/cms/s/8d3d708a-18ae-11db-b02f-0000779e2340.html

  • Posted by bsetser

    RiSK — I don’t think Chadha/ Nystedt touch on the Fed cycle in their paper, but i need to double check.

  • Posted by Gcs

    no time to read sage commenters

    but brad very thought provoking post ….
    the shift in dom/fof us bond holders

    yet another “moving part ”
    with unclear qualitative connections
    to the rest of the global system

    i pray there is either a pre established harmony
    that will get us thru the rapids ahead
    orif not
    and we’re beat to holy hell
    that there’s a new jerusalem on the other side

  • Posted by psh

    El Diwany’s arguments go double for blinded currency, but it’s not hard to get MEers interested in that, maybe because it permits anonymous payment. That will have to come to market in response to ‘AML’ antiterror hysteria, and I’ll be amazed if it doesn’t show up there first, Sharia notwithstanding.

  • Posted by OldVet

    The strange case of using the US dollar as a safe haven is not the only anomaly in recent years.

    Another is that the US stock markets rose almost continually from the beginning of Fed tightening of interest rates – the rise in equities corresponded roughly to rising interest costs. That too may “revert to mean” in coming months.

    My own personal bet is that other currencies will gain allure in future, to the extent that they are not in middle east, and not markets run by religious nuts. That would exclude US, clearly, but favor the Euro, Swiss franc, and northern European currencies along with Brazilian rial. Asian governments have driving goals of employment for their people, which consistently has trumped “rational” government/CB investing, from the US point of view. Most econ models assume “rational” or profit-oriented behavior, which does not seem to govern much of the world, including the US lately.

  • Posted by RXM

    Granted; one can’t draw conclusions from a handful of trading days. However, when I saw the recent “flight to quality”, I considered it a good opportunity to purchase more Euros near $1.25. Looks like I wasn’t exactly alone. Guess I’m with OldVet here.

  • Posted by Gcs

    now have read some comments

    nice going
    at making sense or sense like sounds

    i might suggest
    despite all this analytic power
    brought to bare here
    the novelty of the present
    payment waters
    the globe is passing thru
    needs heavy underlining
    and with it

    this warning

    be humble in the eyes of the gods of the system

    as an old retired
    advisor
    to money changers now ghostic

    beware the “obvious” safe play

    a structurally weakenable
    dollar
    means eventual
    flight to “strong “x or y or z

    that eventual may prove hard to bracket
    at least close enough to profit by

    wasn’t there a surprising
    dollar rally not so long ago???

    …all makes sense now …but then …. just b4

    i’ll admit
    i wouldn’t want to live on
    calling those turns…not now
    not with the system
    behaving like its shown it can

    thanh god
    for me
    its just a spectator sport

    but for humanity
    who the hell knows what big things next

  • Posted by bsetser

    GCS — the world throws us curveballs (or challenges goalkeepers with bent free kicks, if you prefer a European metaphor) on a regular basis. I was sure the US NIIP would decline from 03 to 05. I was wrong. Things sure feel unstable, but who quite knows how.

    I want to thank all those who commented on this post — I am continuously amazed at the quality of the discussion that some of my more technical posts (or in this case, summaries of the technical arguments others have made) have elicited.

  • Posted by Guest

    re: “Asian governments have driving goals of employment”

    we’ve got some very innovative definitions of ‘employment’ happening – along with the motivations behind its creation, not only in Asia. My cynical side would say much of it comes back to new spins on an old-fashioned driver – harnessing cheap, debt-bonded labour to facilitate profit making and power consolidation by elites.

    re: “rational” or profit-oriented behavior

    Lots of rational and profit oriented behaviour happening – but the problem has always been that it is fragmented by competition, meaning that much of it is counterproductive predatory, or “evening the score” type stuff. It could be argued that the markets have had some capacity to ensure that, overall, some level of progress is achieved – that the positives maintain a thin margin over the negatives. Over the longer term, we’ll see. But efficient market hypothesis? Just look at the number of ‘subscriber only’ links that show up on this blog as an indication of how much ‘markets reflect all known information’, let alone the estimates of the total daily volumes that may be driven by insider transactions.

    re: “Euros near $1.25″

    presume that is relative to USD – so your profit is still largely dependent on EUR/USD – and that profit when taken is likely to be translated back into USD. Think we have to stop looking at the USD in comparison to other currencies. It is much more complex than that.

    re: “focus on the price action (both short and long term) of “each” market “independently”

    hear what you’re saying, but as USD and oil correlations are so complex, and becoming more so, isn’t really possible. the traders I know who lost serious money did that by focusing too much on one market and not the externalities – recognizing that others may have drowned themselves in noise, as you seem to be saying.

    Someone mentioned that we need better ways of qualifying references to USD devaluation/appreciation. It’s my understanding this is one of the markets’ safety valves. Although some movements can be painful overall a necessary mechanism set up to relieve pressure that otherwise could escalate into blowups.

    re: “oil is used mainly for transportation”
    not so sure that the largest portion of oil use is for movement of people, given the amount of energy that is used up in the production and transportation of goods. Its always politically correct to blame everything on the masses, but whether commodity prices go up or down, if there are supply constraints, its my understanding that China’s resource dependent manufacturing base would be hit hard if suppliers decided they had to focus more on serving their home markets.

  • Posted by MrBill

    HZ wrote: “MrBill,

    Your argument makes little sense. Oil is a very small portion of Chinese energy supply. Your overall energy/gdp has little to do with oil efficiency and does not answer the original poster’s question (which was on oil). Chinese car fleet (main user of oil) probably has better mpg average than US with smaller and newer cars (on average). It is true a taxi cab driver produces a lot less GDP on the same passenger miles than US, but that just points to the absurdity of the efficiency measure you are using. To put it this way: oil is used mainly for transportation so a poorer country (with lower transportation prices) automatically get less GDP/oil no matter how efficient they are.”

    AND

    Guest wrote: “re: “oil is used mainly for transportation”
    not so sure that the largest portion of oil use is for movement of people, given the amount of energy that is used up in the production and transportation of goods. Its always politically correct to blame everything on the masses, but whether commodity prices go up or down, if there are supply constraints, its my understanding that China’s resource dependent manufacturing base would be hit hard if suppliers decided they had to focus more on serving their home markets.”

    I am glad my arguments make very little sense. That kind of feedback always forces me to sharpen my analysis! ; – )

    We are talking about China’s energy mix today versus the US’ and other countries energy mix today. The world price of oil has recently (2000-2006) tracked economic growth in China (would post the link if I had it handy).

    Although it is true that gasoline & diesel are mainly used as transportation fuels, and we should not confuse energy burned to produce goods & services versus energy consumed for leisure as an example, we have to assume that a growing economy uses more energy of all forms.

    And as China is starting from a high base relative to its competitors like Japan, Germany and the USA, it has the farthest to go to grow while reducing its energy per unit of output.

    It is China’s stated goal to double it GDP. China’s YTD imports of ‘imported crude oil & products’ (not coal or substitutes) is up 16% versus economic growth of 11%. I do not really know whether coal & other energy consumption is higher than 11% or 16% or not? I suspect all energy consumption is higher than the 11% in nominal growth?

    But that is today. Forecasts are that by 2020 the Chinese economy will be as large as the US economy on a PPP basis. Fine but you have to import crude & oil products in hard currency, not on a PPP basis. Therefore, energy efficiency does matter, no matter what your energy mix is. Especially, if you are a net importer, and I guess China imports coal as well, from Canada for example.

    Also, the miracles of long distance transport over water do not extend to the interior of China to the same extent. So developing the coastal regions for export is one stage of development for China, while developing the interior is another.

    Interior development will rely on rail as well as road transport using transport fuels like say gasoline and diesel. If I am not mistaken, coal is transported from the interior to where it is needed via truck using diesel? So even if China has a more optimal mix today between coal, hydro-electric, wind, solar, geothermal, nuclear, etc. compared to imported fossil fuel (and I am not sure it does) future growth will by necessity come from consuming more of all the above mentioned sources of energy in which case energy efficiency still matters. China is afterall a large country, too.

    And at the end of the day, if we look at land, labor, capital, intangibles, etc. energy is a cost of production. Whenever we have a cost, we want to minimize it while optimizing revenues. Also, in a country with a population of China, a couple hundred million new affulent and middle class consumers are also going to increase China’s non-production use of transport fuels as well. As China becomes the largest car manufacturer and some of those cars are sold in China for example.

    I hope that helps to clarify my point?

    RE ” Your overall energy/gdp has little to do with oil efficiency and does not answer the original poster’s question (which was on oil). ”

    Brad’s original question was whether high oil prices help or hurt the USA. I see relative energy efficiency as an important component in answering that question. Thanks.

  • Posted by MrBill

    Sorry, are high oil prices good or bad for the dollar? I think I argued my point about oil producers and where they invest their savings and direct their investment as opposed to in which currency oil is currenty prices as being more important. Thanks.

  • Posted by MrBill

    According to Bloomberg Magazine, China is now the world’s 2nd largest consumer of oil at 6.5 mbpd versus the USA at 20.5 mbpd, but that demand is set to grow to 14.2 mbpd by 2025 (which conveniently ignores peak oil as a geological fact), but in any case, both the USA and China are net importers of crude, will never ever become net exporters again ever, and as oil prices churn upwards, both will see their import bills for energy increase directly and for base metals and commodities indirectly.

    As I doubt that revenues from US integrated oil & gas and oilfield service companies can offset these rising imports bills in dollar terms, I fail to see how rising oil prices can be good for the US dollar, unless other major importers of crude, or energy in general, are even less efficient?

    Sorry to harp on, but just reading how VCs are going to save the planet and make a tonne of money from clean energy when I came across the consumption numbers.

  • Posted by Guest

    re: “I fail to see how rising oil prices can be good for the US dollar”

    as long as oil, and innovative financial instruments that trade off the price of oil, are priced and traded in USD, might be assumed that an increase in oil prices would keep demand for USD brisk? But how other currencies and (real) economies (including US domestic economy) respond might not be so easy to predict. Mechanisms of control have to be important(?), thinking, in part, about the limited press generated by the Brown-Hruska resignation.

    just looking at your analysis, (thank you) might be said that developing nations are more dependent on oil as the petro nations need the demand (which could be destroyed by high price) for the revenues to grow, exporting nations need their markets, which might be diminished by high oil prices, and as you point out, development is a very energy intensive process…

    perhaps also, the nation which is in the best position to implement proven alternatives and energy saving technologies – and that is structured in ways that large portions of the population are not overly dependent on travel and physical goods transported over long distances.

  • Posted by MrBill

    “”just looking at your analysis, (thank you) might be said that developing nations are more dependent on oil as the petro nations need the demand (which could be destroyed by high price) for the revenues to grow, exporting nations need their markets, which might be diminished by high oil prices, and as you point out, development is a very energy intensive process…””

    As we have seen the growth that has propelled oil prices to current levels has also supported base metal and commodity prices that many emerging markets export, so actually many countries in Africa, Asia, Central America, etc. are experienced full coffers on the back of higher prices, as those prices have not yet reached the level where it has curtailed demand in the fast growing economies or destroyed end user demand in consuming countries, at least not, yet.

    Actually, as per Brad’s comments last week, according the the API, actual demand was below potential or trend demand in 2006, even though nominal demand increased. This indicates that we are reaching prices that can curtail demand finally. Actual demand was 1.5-2.0% lower than trend.

    And according to Goldman Sachs, here is their latest on demand destruction from higher prices.

    “” US savings rate has accommodated the sharp rise in energy prices

    In an environment of rising house prices and thereby rising household wealth, US households have so far used their savings as a buffer for recent energy prices fluctuations.

    However, given the already sharp reduction in the savings rate, as the housing market slows and consumers come to accept that higher energy prices are not transient, then to maintain the current level of energy consumption either income will need to rise or the demand for other goods and services will need to be curtailed.

    As income is not likely to accelerate, the most likely outcome is that the demand growth for both energy and other goods and services will slow.

    As a result, there will be a greater dependency on the rest of the world as the driver of energy demand.”” Source: Goldman Sachs, Energy Weekly, July 24, 2006

    Going forward then we may start to see the reduction in demand in absolute terms and that may squeeze those exporters in the developing world.

  • Posted by psh

    Suggestive interaction between
    yield differentials and safe-haven status. Hildebrand of SNB warns of mideast risks and CHF falls. The reasoning seems to be that SNB might let up on rate hikes to offset currency appreciation. The anticipated reduction in yield differentials seems to dominate the regional risk. The US’ position is not comparable, though, as we have demonstrated our capacity to gain safe-haven dollar strength by bringing on the apocalypse and the second coming of Jesus Christ our Lord & Savior.