Oil price surge to hit weak dollar

RISING oil prices will damage the US dollar, a leading economist warned yesterday.

America is the Western world’s most voracious consumer of oil and, as it hits new record highs, the implications for the US are serious, warned Ulster Bank Markets economist Niall Dunne.

The impact of dearer oil on disposable income has implications for US growth and will add to the dollar’s woes going forward, Mr Dunne said.

On Wednesday the greenback hit an eight-year low to the euro when it reached $1.2368. Modest ground was recovered yesterday, despite oil reaching new highs.

The current cost of oil will hurt US growth, as an effective tax on consumers’ disposable income, said Mr Dunne.

As a result, the US Federal Reserve has accepted that all future interest rate decisions will be data dependent, meaning rates will not rise again unless the economy continues to grow, said Mr Dunne. A third reason why he sees the dollar weakening is the state of US politics.

US President George W Bush may be faced with a hostile Congress in the months ahead, as voters are expected to give Democrats back control of the US Senate and the US House of Representatives.

That wold make Mr Bush a “lame duck” president for the next two years, while the possible departure of John Snow, as head of the US treasury, a proponent of a strong dollar, also has negative implications for the dollar, Mr Dunne said.

Meanwhile European Central Bank (ECB) rates look set to rise for the same reasons the US dollar is heading south. Higher oil prices is hitting ECB inflation and the bank’s top economist, Otmar Issing, forecast a hike of 0.25% in rates when the ECB meets in June. If that happens, the hike will add further to the euro’s attractiveness as an investment currency, which could also hit the dollar.

Irish economists have been forecasting dearer interest rates in Europe for some time. Better growth prospects and the threat of inflation, now heading towards 2.2%, will force the ECB to respond faster with a rate hike. When the ECB meets in early June rates will almost certainly be jolted forward by another 0.25% as the ECB moves on rising prices.

Keeping inflation close to 2% is the bank’s sole mandate and Mr Issing made it clear yesterday that the oil factor has made a June hike a distinct possibility.