Eurozone inflation numbers caused a break in the dollar, a rally in oil and a surge in the euro! Any doubts that the Eurozone will hold back on a rate increase because of all the downgrades and credit problems with Portugal, Ireland, Greece and so on will be put to rest. EU inflation surged to a much hotter than expected 2.6% rate which has backed Jean Claude Trichet into a corner who will have no choice but to raise rates if he wants to retain any semblance of creditability.
A rate increase in Europe will be very bullish for oil unless the Fed signals that our own rate increase might not be too far behind. As I have said many times, central bank policy here in the US has been a major driver of energy and commodity price surge that we have seen in recent years. It is a position that has been criticized and many disagreed.
Well it seems that at least one Fed Official is finally admitting what should be obvious to almost anyone at this point. Bloomberg News reports, "’The Federal Reserve's ‘highly accommodative’ monetary policy is partly to blame for rapidly increasing global commodity prices,’ said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon. ‘Once again, there are signs that the world is building new economic imbalances and inflationary impulses.’ Hoenig, the central bank's longest-serving policy maker and lone dissenter at meetings last year, said in a speech in London, ‘The longer policy remains as it is the greater the likelihood these pressures will build and ultimately undermine world growth. Policy should acknowledge the improving economic trends and begin to withdraw some degree of accommodation,’ he said. ‘If this is not done, then the risk of introducing new imbalances and long-term inflationary pressures into an already fragile recovery increase significantly.’"
It is nice to see at least one Fed official admit it. Fed Chairman Ben Bernanke on the other hand has rejected the idea that their policies fueled gains in commodity prices, pointing instead to rising demand among emerging-market economies and disruptions in supplies. Bernanke, in testimony to Congress on March 1, said commodity prices, "have risen significantly in terms of all major currencies," and not just the dollar."
Mr. Bernanke is right in one sense that commodities have gone up in many currencies! That is because there is less confidence in all paper currencies. When confidence lacks in paper, hard commodities by default have more value.
As Bloomberg pointed out, "As of yesterday, crude oil jumped 35 percent over six months as turmoil in the Middle East threatened to disrupt supplies. Corn rose 38 percent and cotton climbed 89 percent."
Most of that was because of QE 2 and not speculation. The strongest influence in the price of a commodity is the perceived value of the paper currency it is exchanged for. Keep on printing and Mr. Hoenig will be missed.