Monday, May 26, 2008

Dollar Bashing -- Overdone?

Sometimes the Wall Street Journal is a little too transparent in its editorial bias. Take the article, "Oil Is Up Because the Dollar Is Down" from page A13 of the May 23rd issue. Granted, this is a signed editorial by David T. King, not someone the Journal staff, but it faithfully reflects the viewpoint of the staff, which is that the European Central Bank is maintaining a strong euro through robust monetary policy, while the Federal Reserve is pursuing a weak dollar through lax policy. In King's view, this policy is to blame for high gas prices at the pump.
Mr. King points to the dollar-euro parity of 2002, when oil was selling at "about 25" dollars a barrel. He contrasts that with now, when a barrel of oil is running for "about 75 euros a barrel," a threefold increase, versus "over $120 a barrel" in the US, a fivefold increase. His conclusion: "The sole reason for this enormous difference is the incredible depreciation of the dollar against the euro." One can't argue with that. The differential is by definition the result of dollar depreciation. But one can certainly argue with the inferences he draws from this fact.
"If it wasn't for the falling value of the dollar, the price of gasoline wouldn't be an issue," he claims, adding that "It's to blame for the excessive price of gasoline, and now is pushing dangerously into wholesale price inflation, based on the most recent data published by the Labor Department."
This statement raised red flags for me, seeing as how I live in a euro-currency country -- the Netherlands -- and actually fill my car here with gasoline paid for in euros. In fact, I just filled up last Saturday. How much did I pay for a gallon of premium? Well, for a liter I paid €1.66. Convert that over to dollars per gallon, and you have $9.88. Hmmmmmm. Boy I'm glad I'm paying in euros! Otherwise, in dollar terms I'd be paying less than $4.00, or 2 1/2 times less. Which is roughly the ratio I've been familiar with ever since I can remember, and I've lived in the Netherlands since 1990. So the falling dollar hasn't helped me a bit as far as filling the tank's concerned.
This bias against Fed policy does not appear to be borne out by consumer price index data, either. Take this simple graph I made, contrasting US and EU CPI data against the background of the dollar-euro exchange rate (sources: exchange rate: Yahoo Finance, CPI data: International Monetary Fund Data Mapper []):

Dollar depreciation was accompanied by US CPI gains between 2002 and 2007, while EU CPI remained stable. But in the last year-plus, EU CPI has jumped along with US CPI, nearly equalling it, even as the dollar has dropped further and the short-term interest-rate differential has widened (maybe I'll put that in a graph too at some point). So where is the correlation between spiking prices for the US as opposed to the EU? It hasn't been there, at least since 2007, when the dollar really tanked.

Dollar bashing is all the fashion, but don't get caught up in it, otherwise poor investment decisions could well follow -- that's my nugget of advice.

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