Money Matters

• Apr 21, 2008 3:12 pm US/Pacific
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  Is A Weak US Dollar Tied To High Oil Prices?

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Is A Weak US Dollar Tied To High Oil Prices?

QUESTION:  I read on a message board that the price of gas in the U.S. could be tied to the declining value of the American dollar on worldwide markets. Is this true?"

ANSWER:  The price of gas going up can in part be linked with the declining dollar.  Because the oil markets are denominated in US dollars, when the dollar declines relative to other currencies oil becomes cheaper for the currency in question.  If a "good" that is in demand has a declining price, be it an absolute declining price or a declining price due to the currency the good is denominated in, demand for that product may escalate which will in turn drive up prices.  I would suggest that the rise in oil prices is due to three factors.  The first is a real increase in the worldwide demand for oil.  The second is the falling dollar, with the reasons outlined above.  The third is due to speculation where you have investors simply bidding up the price of oil as they are chasing the "hot" investment.  Eventually, as the demand of oil slows, or the dollar rebounds the speculative demand for oil will subside and the price may come back down as quickly as it rose.

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Money Matters is provided by:

David Schauer, CFA, MSFA, CFP®
Financial Planner
Hanson McClain
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