Oil prices did not take too long to ring in the New Year with a new record just above $100… … per barrel today, before falling back just below the century mark. As oil prices soar and Wall Street remains uncertain about its next move, the dollar has slipped back against European, Asian, and other world currencies. Gold also reached a 28-year high at $860 per ounce Wednesday.

As oil prices have broken to new highs with significant growth in the last year, gasoline prices are still below their record national average (currently $3.05) of $3.22 per gallon, reached last May. Other energy prices have also not seen the same spike that oil has during the winter season. Most economists do not believe this trend will last.

While discussion of $4.00 per gallon gasoline peaked this past summer, many believe that unless oil reverses dramatically, simple economics says gasoline will have to move to catch up with increased oil prices at some point. Some suggest this summer could bring about this pinnacle move.

Interestingly, although surveys indicate Americans grow concerned as gasoline and energy prices rise, typical Americans do not make radical adjustments in lifestyle with higher prices at the pump. Even though the United States has a strong cultural dependence on auto transportation, gasoline does not represent a significant portion of discretionary income for most. Thus, $4.00 gasoline would definitely cause alarm and political fall out, but would ultimately have little impact on consumer driving behavior. Some expect higher fuel to affect air transportation, however, as already high airfare could see dramatic spikes during a strong spring and summer travel season.

As is the norm, the jump in oil prices helped spark a decline in the value of the dollar against most other major currencies. After spending a few days above 114 Yen over Christmas, the dollar currently nets only 109.54 Yen. It only took a little over a week for the dollar to drop five full pips. Much of the drop can be attributed to the lower equity markets from late last week and into the New Year. Carry trades against the lower interest rate Yen generally fall with lower financial markets due to risk reduction.

While the move against the Yen has been the strongest, the dollar has also moved back against the Euro and other currencies. It currently takes 1.474 dollars to net a Euro, just a little over a pip under the all-time record from November. A look at the short and medium term charts suggests the dollar could be primed for a spike up or down after a gradual move back toward the high.

Interestingly, the dollar has surged against the British Pound in recent weeks, thanks largely to a move to historic highs by the Euro against the Pound. The Euro expanded by adding Cyprus and Malta on January 1. After the Pound peaked above $2.10 in value, it has fallen sharply and trades below $1.99. This suggests some concern of potential cyclical slumps in Britain to follow housing and mortgage struggles in the US. Additionally, the Pound is one of the fastest movers against the Yen, and has been impacted more heavily than the dollar as the Yen has strengthened.

With important employment data coming out in the US tomorrow (January 4), the already strong financial market moves to kick off the New Year could be enhanced. The Dow sits just above 13,000, an important psychological mark. The dollar continues to struggle against many currencies, especially currency backed by oil and gold reserves. Climbing oil prices could spell more trouble for a struggling economy and equity markets.

President Bush is contemplating an economic stimulus package to help overcome challenges in the housing and mortgage markets and other financial sectors. While an announcement could spark a strong move in equities, long-term economic stability and growth in housing is still dependent on underlying supply and demand economics and consumer confidence and spending.

Market Recap

The US equities markets were mixed on Thursday following a 200+ point drop in the Dow Wednesday. The big news on Wall Street was oil breaking the $100 per barrel mark for the first time, before falling back. Gold also reached a 28-year high of $860 per ounce Wednesday. President Bush is contemplating an economic stimulus package which brought hope to some investors still concerned about housing and mortgage troubles. Employment data due out Friday fueled much of the cautious trading Thursday.

Neil Kokemuller
Thursday, January 3, 2008
7:24 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 with a specialization in marketing.

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