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BA Deere
Honored Advisor

Saudi oil influence on US dollar.

When oil price goes down, the dollar goes up.  This shows how precarious that the "strength" in the dollar is.

 

http://secularinvestor.com/saudi-arabia-sets-global-currency-markets/11347/

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6 Replies
Palouser
Senior Advisor

Re: Saudi oil influence on US dollar.

Seems more like another trader 'story' to me. Waaaay too speculative an explanation for me. Yes, oil is important and affects the global economy all sorts of ways - but the run to the $US as a safe haven when things are tumbling makes more sense. The price of oil compared to the huge reservoir of global $US currency is sort of a drop in the bucket IMO.

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BA Deere
Honored Advisor

Re: Saudi oil influence on US dollar.

I`m not saying that I know, however all the oil that is produced in the world is sold in US dollars, that is a perk of being the "reserve currency".  About 70 million barrels of oil is produced every day take that times 365 and that times $40-$60/barrel about $1.25 Trillion per year. 

 

All that a "strong" dollar basically is, a weaker Euro, Yen and Pound.  I don`t know the volume that is total in those 4 comparitive currencies.

 

In a nutshell Saudi Arabia is the price setter of the price of oil, if that theory is correct that they could cut production to some what raise the price of oil and lower the dollar.  Then Janet Yellan could say "Hey Hey Hey what`s this? the dollar is weaker, so now we can raise interest rates!".

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Palouser
Senior Advisor

Re: Saudi oil influence on US dollar.

I agree that the Saudi's are the price setter of oil, no doubt about it. They have enough reserve pumping capacity to actually change the daily flow and the excess oil over usage can register fairtly quickly. All they have to do is raise the amount of oil on hand over whatever 'normal' is and then we are 'awash' in oil.

 

But that doesn't help Yellen. Yellen isn't going to raise interest rates no matter what the Saudis do if nobody is interested in borrowing or lending. An arbitrary raising of the interest rate under those circumstances means stalling the economy further. And that is EXACTLY what she can't do. Yellen is not in charge in that sense. The banks and consumers are. And right now they don't like each other much. Consumers are suspicious of banks and banks are trying to gouge consumers with fees and aren't really that interested in lending. AND they're too big to fail and they know it. Kinda like farmers in that respect. Nobody wants us to fail.

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BA Deere
Honored Advisor

Re: Saudi oil influence on US dollar.

Pal, I think the problem is that the Fed will have to raise rates to get investors to take on our increasing debt.  There`s alot of competition out there.  There is a world debt of $200 Trillion

 

http://www.zerohedge.com/news/2015-05-14/global-debt-now-200-trillion  

 

i`m on a board that came into some money and we`re being courted to invest that money, it`s enough that we can get the top managers with a 4% return and free to take it out at anytime.  I notice that their investment basket is about 30% US equities 30% non-US equities and a 15% in inflation indexed bonds.  But 4% is considered a super return in a safe haven with a large chunk of change. The Fed is going to at some point get competitive CDs in the bank at 1.5%-2%...they aren`t the only game in town.  And rumblings of "negative interest rates" really would be the last straw.

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timetippingpt
Honored Advisor

Re: Saudi oil influence on US dollar.

Palouse is right on this one. Saudi oil is miniscule in the terms of global currency flows.

 

More important is how bizarrely out of position the FED is on rates. They continue to force money out the risk curve when unemployment is 5.4%? Creating incredible instability for no apparent reason. Thus you see long bond yields start to spike higher because all the smart money knows short rates are way to low and that will lead to problems.

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BA Deere
Honored Advisor

Re: Saudi oil influence on US dollar.

Well all oil in the world is denominated in US dollars, even oil pumped in Russia and sent to China. Now, Saudi is the oil "price setter" so can`t the "tail wag the dog"?  That reserve status of the US dollar is so important that some say that is what was really behind our skrimishes in the M.E. and Asia.  Regardless if you guffaw at that, losing that US dollar reserve status would be a big deal for us/US the party would be over, the rest of the world would muddle through. 

 

I guess one way to look at it, a restaurant that specializes in "Ribs and wings" is at that mercy of the guy that delivers their barbarcue sauce.

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