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London: The dollar's slide to record lows pushed oil to new highs on Wednesday, but this symmetry could soon be broken.
The euro hit another record high yesterday after the US Commerce Department reported that the US economy braked to a near halt in the final quarter of 2007. That finding pushed the euro to a record $1.5185 in late afternoon European trading‚ up from $1.5120 in New York the previous night and above its previous record of $1.5143 reached on Wednesday.
The pound rose to $1.9895 from $1.9842. The dollar dipped to 105.75 yen from 106.45 yen.
US oil futures hit a new peak of $102.08 a barrel on Wednesday, very close to the inflation-adjusted high of $102.53 struck in 1980.
"In essence, the Fed's interest rate cuts have supercharged commodities," said Richard Batty of Standard Life.
The US Federal Reserve meets again in March and analysts have said another rates cut could be on the cards.
That would drive investors further away from the US currency and make dollar-denominated assets such as oil relatively cheap for financial investors.
It would also erode the income of oil producing states, increasing the likelihood the Organisation of Petroleum Exporting Countries would seek to keep prices high by limiting output. If recession arrives, however, financial players could be expected to return to the dollar, still regarded as the international currency and for many, a safer place than commodities, which could fall victim to a drop in demand.
"In terms of the dollar, our belief is that it is better to arrive than travel," Batty said. "Hence as the US economy slows, the dollar can weaken. If the economy enters a recession, the dollar should be supported as international investors become more risk averse."
A stronger dollar could halt the rise of oil prices, but many analysts predict they are very unlikely to collapse. "Dollar strength to commodity price correlation is very clear," said Mark Mathias of London-based fund manager Dawnay Day Quantum.
"If the dollar strengthens it will create a longer holding period in the $90s or $105s - it will slow the growth of the oil price."
That said, he predicted the long-standing relationship between the oil price and fundamentals of supply and demand would be a reason to carry on buying, ultimately taking oil to the next price threshold of $110 a barrel.
Some consumers would feel the pain of high prices as, even when measured in stronger currencies than the dollar, commodity cost increases are still significant.
But a US-led recession would have a limited impact on demand in a rally largely driven by rising Asian economies, Mathias said.
"Oil demand growth is like a train on tracks. It's not going to stop... The growth story in energy is quite price inelastic - China and India are going to industrialise... the genie is out of the bottle," he said.
In dollar terms, oil has risen by 6.3 per cent since the end of last year, compared with a 3.4 per cent rise in euro terms.
For some other commodities, the currency effect is smaller.
Spot gold priced in dollars has risen by more than 15 per cent this year, while in euros it has gained 13 per cent.
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