The WSJ editorializes (The Fed’s Bender, Wall Street Journal: Apr 28, 2008) the fall in the value of the dollar as nothing more than poor monetary policy on the part of the Federal Reserve. They point out an interesting comparison between the price of oil in dollars versus euros since 2003.
What escapes them, or perhaps they don’t think there is any relationship — is that Euros (the people) spend far fewer euros (the money) on vehicle fuel. Despite a far higher price at the pump for fuel. In other words, their per-capita fuel consumption is far lower than American’s. While Europeans enjoy “low” oil prices, they are simultaneously raking in huge tax revenues that can be used for projects. Whereas America is suffering from high oil prices and sending enormous and ever-increasing amounts of dollars to oil producing nations. Thus the “solution”: suspend gas taxes. But that will decrease revenues for projects at home, and exacerbate (lowering the price of gas means consumption will increase) the trade deficit, worsening the value of the US dollar. A lose-lose situation.
Like oil, world trading in most commodities is denominated in dollars. When the dollar declines, especially as fast as it has since September, commodity prices surge and speculators gamble on even further declines. As the nearby chart shows, since 2003 the dollar price of oil has climbed far more rapidly than has the euro price — 273% in dollars, compared to 146% in euros. (See accompanying chart — WSJ April 28, 2008) Note in particular the oil spike in dollars since the second half of last year. This reflects the European Central Bank’s sounder monetary management. And it means that had the dollar merely retained the same purchasing power as the euro, today’s price of oil would be below $70 a barrel.
— The Fed’s Bender, Wall Street Journal: Apr 28, 2008. pg. A.18
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