Sunday Edition: October 21, 2007
Something Wicked This Way Comes
It was only a matter of time before prices at the pump went up with oil hovering around $90. According to the nationwide Lundberg survey of about 7,000 gas stations, the national average for self-serve regular unleaded gas was nearly $2.80 a gallon on October 19, up 4.92 cents per gallon in the past 2 weeks. Survey editor Trilby Lundberg told Reuters this weekend that:
While gasoline prices moved up just under a nickel in that period, crude oil prices are up the equivalent of 18 cents per gallon. That missing 13 cents and more will probably turn up at the pump and soon because it represents margin squeeze over months for refiners, jobbers and retails — those who make, deliver and sell gasoline.
At $2.80 a gallon, gas prices are 60 cents more than at this time last year. The all-time high of more than $3.18 was reached back on May 18, 2007. High gas prices act as a drag on the economy. The more they rise, the more consumers have to spend on fuel and the less they have to spend on other goods and services, which drives the U.S. economy. Lundberg noted that the average price is likely to exceed $3 per gallon in coming weeks.
G-7, G-Whiz
Talk about sending the wrong message. The Group of Seven (G-7) finance chiefs ended their weekend meeting without offering verbal support for the U.S. dollar.
The G-7 consists of the United States, Japan, Germany, France, Britain, Italy and Canada. G-7 finance ministers meet several times a year to discuss economic policy. While the officials urged China to speed up appreciation of the yuan, it did not comment on the prevailing dollar weakness against other currencies, most notably the euro. Analysts have said this silence was largely expected, since U.S. leaders are hoping a weakened currency will boost American exports and reduce the massive current account deficit. Yet, should the decline in the dollar’s value continue to accelerate, foreign investors may sell their dollars and move their cash into other markets where interest rates are rising and whose economies appear better off. The American economy will suffer. An Associated Press article from September 25 talked about such a scenario:
If foreigners’ buying habits change, that could have a broad impact on financial markets- and U.S. consumers, too. For instance, if they sell their U.S. Treasury holdings, or don’t buy new government bonds or notes, then Treasury prices will go down and yields will go up. That will likely send mortgage rates higher since they are pegged to the 10-year Treasury note. That could unravel any good that has come from the Fed’s rate-cutting action and put the economy in a precarious spot. It makes you wonder why this administration isn’t doing more- or anything- to help the dollar.
Currency traders interpreted the silence as meaning official attempts at propping up the greenback are unlikely, according to Reuters earlier today. Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, said “The G7’s statement effectively gives a green light to continue selling the dollar.” Traders may refocus this week on slower economic growth in the U.S., high oil prices, and the housing slump. Phyllis Papadavid, currency strategist at London-based Societe Generale, told Reuters that, “There’s acknowledgment that the fundamentals in the U.S. economy aren’t up to scratch at the moment, and in that regard the dollar isn’t in the clear.”
The greenback has been falling for more than 5 years now, and recently hit a new low against the euro and 26-year low against the pound. While the U.S. dollar lost 8% of its value last year against a basket of foreign currencies, it is already down another 7% to date. Still, Washington claims to support a strong dollar policy. On October 16, U.S. Treasury Secretary Henry Paulson said:
In terms of the upcoming G7 … the strong dollar is in our nation’s interest. I have said repeatedly that, and currency values should be determined in competitive markets, based on underlying economic fundamentals.
Actions speak louder than words, Mr. Secretary.
Follow Through
In a post from last Thursday, I talked about how overseas private investors sold a record amount of U.S. securities in August. According to the U.S. Treasury Department earlier in the week, the total holdings of equities, notes, and bonds fell a net $69.3 billion, after an increase of $19.5 billion in July. The outflow from U.S. assets was a record high and the first since the financial market crisis back in 1998.
You may be interested to know that former Federal Reserve Chairman Alan Greenspan said in a speech earlier today that the recent performance of the U.S. dollar may be tied to overseas investors unwilling to buy more U.S. debt. Speaking from Washington, D.C., Greenspan said, “Obviously there is a limit to the extent that obligations to foreigners can reach.” According to Bloomberg, the popular, yet controversial, economist noted that the dollar decline may be “an indication America is approaching this limit.”
Parting Shot
Back on July 2, I wrote about U.S. Treasury Secretary Henry Paulson and his views on the troubled U.S. housing sector:
The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.”
In my August 1 post, I talked about how Secretary Paulson felt that housing’s economic fallout was contained:
According to Reuters, “Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained,’ despite losses in a number of financial institutions and a long period for subprime issues to move through the economy.”
Fast forward to October 16. The former Goldman Sachs chairman had this to say to Georgetown University’s law school:
But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.
Good grief…
Have a wonderful week,
Christopher E. Hill
Editor
editor@boom2bust.com
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