Oil hits new highs as dollar sinks

Oil carried on its upward trend yesterday almost hitting $120 a barrel supported by supply concerns largely driven by rising demand from China.

In addition, sentiment may have shifted and ignited a rethink towards the backing for biofuels in the US and Europe as rising food prises may mean this solution to the oil supply issue may no longer be commercially viable.

Rice jumped to a record high as World Bank officials stated they were concerned with the mounting pressure in Thailand to restrict shipments. Thailand is the world's largest exporter of rice and these comments help add fuel to the worsening global food crisis.

The dollar sank to lifetime lows against the Euro breaking through the significant $1.60 level as hawkish comments from the ECB supported the eurozone currency.

According to traders yesterday, strong demand for the Euro came from Asian sovereign institutions. Also ECB council member Yves Mersch made comments that the central bank may well have to revise up its inflation figure on the back of the recent surge in oil and food prices which pushed inflation to a 16 year high of 3.6% in March for the eurozone.

This has caused certain economists to rethink their rate cut stance with a view there may actually be rate increases ahead.

The Euro lost ground against the pound as Tim Beasley a member of the Bank Of England's (BOE) MPC commented on the recent action to ease liquidity problems in the UK financial system would allow it to focus on controlling inflation.

This also saw the pound rise 0.8% to 1.9955 against the greenback and gained 0.6% to Y205.66 against the Yen.

Elsewhere Bank of Canada (BOC) cut interest rates by 50 basis points to 3 per cent with the Canadian dollar falling 0.5% to C$1.0070.

Although the cut was expected the BOC made changes to their statement stating the expected US slowdown was likely to affect Canadian exports and prompt further rate cuts.

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Sterling hits $2.10 as dollar is dumped

Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign exchange reserves.

The Pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.

The greenback's renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China's National People's Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.

Mr Siwei told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly."

Besides sterling, the dollar was down against 14 of the world's 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.

Sterling's move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.

While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country's manufacturing industry under pressure.

The flight from the dollar is helping to fuel oil's assault on the $100-a-barrel mark and investors' appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed's loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages.

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Dollar falls amongst further tension with China

The Dollar fell sharply against the Pound and the euro yesterday amongst further tensions between the US and China. The Dollar fell around 0.6 per cent against the euro to $1.3439 and by roughly the same margin against the pound to $1.9740.

The intensified tension followed China’s stance to decline an invitation to take part in the G7 talks which are to be held in the US. This seems to be tit-for-tat retaliation against the Americans complaint to the World Trade Organization over arguments about intellectual property rights and China’s restrictions on foreign book and film sales.

Although we are still far away from the dollar high this year against the pound, the added pressure on the US economy, despite strong non-farm pay roll figures last week, has pushed £/$ further in that direction.

An expected result in Europe is rate changes by the ECB and BoE but the question is how soon and in what direction? The consensus in the UK is that there may be a rate increase as soon as May with recent economic data showing UK inflation edging up and retail sales still growing strongly.

The ECB meets this Thursday to discuss the state of the European economy and with the hawks circling over the past few weeks with one hawk, Austria’s Libscher, citing the reason that “everything that is necessary needs to be done to keep inflationary expectations where the are”, they could possibly follow in the same direction.

As mentioned in yesterdays Wise Money report the commodities market may be a key area to keep an eye on this year with oil and gas key components in every economy especially those that are highly dependant and high consumers like the US. An aggressive stance by President Hugo Chaves of Venezuela to take control of several major oil projects owned by American and European companies by May 1st will add further tension, just as it has seemed to ease off after the UK-Iran issue.

Commodity linked currencies have done well this year for instance; the Australian dollar hit a 16-year high against the dollar on Tuesday. Brazil's real touched a six-year high versus the dollar on Monday and the Canadian dollar recently rose to its highest level since December 2006.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.