The dollar, which had remained relatively firm for several weeks despite mounting pressure from rising oil and gas prices, has… … succumbed a bit to start the new week of currency speculation. After clearing 108 yen last week, the dollar currently (July 1) nets just below 106 yen. The dollar is also worth just 1.0179 Swiss francs in current trade after surpassing 1.05 recently.

Moves by the major European currencies have been even more dramatic. The Euro has gained back nearly four pips against the dollar in the last couple weeks of trade and currently collects just over $1.58. This puts the currency of the European Union just two pips from its all-time high reached earlier this year. The British Pound has also retraced over five pips recently and sits just below $2.00 in value. The Pound is just over six pips off its record high.

The currency markets have been relatively flat in trade during the second quarter of 2008. As the new quarter and the second half of 2008 begin, there has been much back and forth speculation as to future direction of the dollar. Some have viewed the dollar’s ability to hold up in light of rising oil and gas prices as a sign the greenback is preparing to fight back. Others believe the extended flat trade is more a medium-term holding pattern before another leg down in the value of the US currency.

The current move down in the dollar is definitely the most powerful in some time. There were a couple intraday events in recent weeks that have caused momentum trading moves, but the presently sharp multi-pip drops by the dollar against most major currencies seems more of a purposeful direction to trade.

It is not surprising that the dollar has buckled given the relentless oil, gas, and food prices. Oil continues to move higher. On Tuesday, oil cleared $143 for the second day in a row before settling back to a new record close at $140.97. Recent reports have indicated a likely move to $150-170 for light sweet crude in the coming weeks.

The national retail gas price also reached a new high Tuesday with the average price touching $4.087. With manufacturing and wholesale prices also continuing to come in at historic highs, it seems likely consumers will still find high prices as the store on staple products like milk, cheese, eggs, and more.

It seems unfortunate that Americans must deal with higher gas prices. Data last week showed a drop in gasoline demand of 2.1 per cent compared to the same week in 2007. Despite ongoing declines in American gasoline consumption, other developing parts of the world continue to contribute to higher worldwide demand. This worldwide demand coupled with supply cuts by some OPEC members keep prices higher and push the dollar lower as the US is reliant on foreign oil.

The more pronounced the current dollar slide the more likely the Fed will move sooner than later to raise its fund rate. As the economy has shown signs of improvement comments from central bank members have indicated a shift in focus to combating inflation. The Fed seems concerned about the weak dollar and the affordability of gas and food for average Americans. Some economists have suggested the board might move to raise rate at its next meeting. Others believe they may wait a bit longer to see if the market can shake itself out to improve price and dollar conditions.

Market Recap

The Dow was flat Monday, gaining three points on the day. Oil moved past $143 as the dollar slid back. Tuesday brought a bit brighter news for equities on the first day of the second half of 2008, and the third quarter. The Dow moved up 32 points on the day, while the NASDAQ and S&P gained 11 and 5 points. There were a couple big company news items as Starbucks announced plans to close 600 stores. Blockbuster dropped its plans to acquire Circuit City. The dollar has dropped firmly against most major currencies to start the currency speculation trade for the week.

Neil Kokemuller
Thursday, July 1, 2008
11:55 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.
Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.