Dollar double talk! If the dollar has your confidence today so completely, the question will be: will you still love it tomorrow? The dollar drives and oil dives. Renewed confidence in the dollar after the G8 meeting and a weak manufacturing number sent oil on a Monday morning dive. Oh sure, at the G8 meeting Russian Finance Minister Alexi Kurdin said stuff like Russia has full confidence in the dollar and there are no immediate plans to switch to a new reserve currency but does he really mean that?
Last week before the G8 Russia joined China and Brazil in saying they would shift some $70 billion of reserves from U.S. Treasuries into multi-currency bonds. The dollar was supported by happy talk at the G8 summit but may not get the same accolades from the BRIC (Brazil, Russia, India and China) at debut summit in Russia today. Yesterday it was all nice talk about the confidence in the dollar and U.S. bonds from Russia, China and Brazil but today it might be a dollar bash. The AP reported that China and Russia sought greater international clout at summit Tuesday, with China promising a $10 billion loan to Central Asian countries, while Russia challenged the dominance of the U.S. dollar as a global reserve currency. The AP reports that Russian President Dmitry Medvedev pushed his call for new global reserve currencies to complement the dollar at the summit. "No currency system can be successful if we have financial instruments denominated in just one currency," Medvedev said. "We must strengthen the international financial system not only by making the dollar strong, but also by creating other reserve currencies." This dollar trash talk could put us in the same type of situation that drove oil to new highs last week. Oil may also get volatile ahead of the June 17 crude oil option expiration for crude oil. There is a lot to keep an eye on.
The unrest in Iran is amazing and some say it is the worst since the 1979 Islamic revolution. Still oil seems unmoved for a couple of reasons. The main one is the amount of spare production capacity in the world. Currently Iran has a total production capacity of 4.0 million barrels yet is producing less. Greg Meyers of Dow Jones cite International Energy Agency data that shows, “Even if tensions with Iran escalated to the point that oil supplies are cut off, the world is in a better position to handle a disruption than it was just a year ago. Global demand is down by more than 3 million barrels a day in the current quarter, while spare capacity tops 6 million barrels a day," according to the IEA. Still even with all of this spare capacity I believe if the situation in Iran turns into a civil war the market will start to care. There are more dead protestors reported as the hardliners crack down. Defeated Iranian presidential candidate Mir Hossein Mousavi appealed for calm and is telling supporters to not go to his rally as more than likely he fears for their lives and his own. Reformers are being locked up and the Supreme Leaders supreme crackdown continues to stifle any dissent in Iran.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com .
