Done in by the Dollar; Congressional Action Can Strengthen Federal Funds

The Washington Times (Washington, DC), May 8, 2008 | Go to article overview

Done in by the Dollar; Congressional Action Can Strengthen Federal Funds


Byline: Eric Cantor, SPECIAL TO THE WASHINGTON TIMES

Just when you thought it couldn't get any worse than paying $3.58 for a gallon of gasoline comes this bombshell prediction from investment bank Goldman Sachs on Tuesday: The price of crude oil - buoyed by the dollar's continued free fall - could rise 66 percent to $200 a barrel within two years.

This would trigger massive price hikes at the pump, a disaster for a consumer-driven American economy already shaken by crises in the housing and credit markets. Fortunately, its emergence is not a foregone conclusion. Congress, the Fed and the Treasury, charged with keeping a stable currency, can drive down the price of oil and alleviate the pain for American consumers by making a commitment to stabilize and strengthen the dollar.

The greenback's struggles are largely attributable to the housing devaluation, a constriction in credit and a fear that a Democratic president and Congress will raise taxes, increase regulation and increase spending in America. In addition, the interest-rate cuts the Fed has undertaken have helped to weaken the dollar. Low interest rates, which make borrowing easier, flood the markets with cheap dollars that weaken the currency. Meanwhile, the inflation-weary European Central Bank has kept interest rates high. Since early 2007, the dollar has dropped 17 percent against the euro, and 13 percent against the Japanese yen. The euro not long ago surged to an all-time high of $1.6018. Everything in America seems to cost more these days. That is, unless you're a European tourist.

But why the close link between the slumping dollar and the price of oil and commodities? Weak-dollar induced inflation has spurred investors and speculators in the futures markets to "go long" on oil and commodities and "short" on the dollar. In other words, investors are pulling their money out of the U.S. currency and plowing it into oil and other commodities. This phenomenon grows fiercer with each whisper of a looming Fed interest rate cut. …

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