The Honeymoon is Over

Modern currencies are not backed by gold or silver, they are backed by the confidence of the consumers who hold and use them. In recent weeks, the dollar seemed to have regained some of the confidence it had lost during the last year; but with alarms sounding throughout the United States economy many investors chose to pull out of the dollar market and seek stability elsewhere, according to CNN Money .

The investors found the stability they sought in oil, elevating crude futures to $119.43 Wednesday, an increase of $3.87 from the previous day of trading.

Typically, a strong dollar lowers the price of oil regardless of consumption, because investments which otherwise would go to commodities such as energy end up going to currency markets. Similarly, when the dollar is weak the price of oil tends to rise, as investors “bid up” prices on the commodities market. This was precisely the case Wednesday, as investors used commodities as a “hedge” against a presumed future devaluation of the dollar.

There are many reasons to be worried about the state of the United States economy, most prominent among them being the housing crisis which has reached pandemic proportions. Therefore, we should expect to see a further weakening of the dollar versus other stable and better managed currencies.

However, gas prices have continued to decline, and we should not expect a massive increase in the price of oil futures. The dollars relative strength does have an effect on the price of oil as stated previously, but the major factor in any price equilibrium is the economics of supply and demand. Thankfully, the United States has seen a significant drop in its demand for oil in recent months. While an early surge in Thursday bidding has put oil above $121 the prospect of oil pushing well beyond $120, or reaching the meteoric peak of $147.25 from July 11, is unlikely. “I think you would have to have something a bit out of the ordinary to get there,” said Neal Dingmann, director of equity research at Dahlman Rose.

Source CNN Money:

Click Here For Solutions To America's Economic Problems:

Click here to contact your Representative in Congress.

Spread this message with Digg, Del.icio.us, Reddit, or Stumbleupon, and subscribe to the RSS Feed to track articles