Oil regains upward trend as dollar plummets

The US dollar has been on the defensive throughout most of this year with the US dollar Index declining around 5.5% for the year to date. The US dollar has been under siege as all signs point to the US Central Bank remaining in an easy money mode well beyond other major economies. The emerging markets have been raising interest rates for almost a year in the fight against inflation while the EU entered the fight earlier this month with their first short-term interest rate increase. The US continues with a policy of exceptionally low interest rates and quantitative easing until at least the end of June. Since the main fundamental driver of currencies is interest rates, one can quickly see the USD is at a strong disadvantage to most other major currencies and thus the selling pressure that has continued on the US dollar. One further note, a weakening US dollar is also inflationary and tends to contribute to higher oil and commodity prices from that perspective.

Global equities have staged a decent rally over the last 24 hours regaining a modest portion of what was lost earlier in the week as shown in the EMI Global Equity Index table below. The EMI Index has gained a tad over 1% over the last twenty four hours with the rally starting in Europe yesterday morning and continuing through the Asian & European trading hours so far. In addition, US equity futures markets are all solidly higher as of this writing and are thus pointing to a higher opening on Wall Street this morning. The Index is now down 0.6% for the week and 0.7% for the year to date. London moved back into the winner's column with only Japan and Brazil still showing modest losses for 2011. China remains on top of the leader board for the year with the US Dow holding the second spot. As I have mentioned a few times, both of these markets are being driven by two different policies. Market participants have become comfortable with the Chinese government's fight against inflation while participants continue to buy US equities as the easy money policy continues to bolster asset values like equities. For today, the global equity markets are supportive for higher oil and commodity prices.

Although the markets have been focused on the financial drivers, the geopolitics that are responsible for the vast majority of the last $20 to $25/bbl increase in oil prices are still evolving...albeit there has been nothing new suggesting another oil supply interruption is imminent. The evolving civil war continues in Libya with way too many innocents getting killed and displaced from their homes. Diplomacy is continuing, but so far there does not seem to be anything close to ending the conflict. The vast majority of Libyan oil production remains shut-in and will likely remain shut-in for an extended period of time.

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