Saturday, August 16, 2008

Oil Prices and The Dollar's Strength Could Be A Controlling Factor For The Market

With the recent history of falling oil prices and a strengthening dollar, the U.S. stock market looks to be set to continue to move higher even with the weak economy being called into question.

With oil prices moving down, the consumer has had some extra "pocket change" to spend. This turned into a somewhat boosted consumer spending last month. The problem is not the past but the future. Will oil stay at the current level or continue to move lower? If it does, the threat of inflation becomes smaller and consumer spending will keep growing - thereby powering the economy along. If oil starts to move higher again, the consumer could be hurt and spending would most likely slow. So what will keep it down?

As we have discussed in many previous posts, oil is tied to the dollar. With the dollar moving up against he foreign currencies, it continues to put downward pressure on the price of oil. This seems to be a trend that at least for the short term should continue. Why has the dollar been stronger?

Well, some economists has thought that the health of the U.S. economy could improve. They believe that the U.S. economy started to falter before most foreign economies, and while those economies thought they would weather the storm, the U.S. started to act (rate cuts, stimulus package, etc.). Now those foreign economies are seeing worse than expected economic data in Europe and Asia. The U.S., because of its early actions, are almost assuredly closer to a recovery than those economies.

As the dollar strengthens and oil goes lower, the effect is that the consumer has more money to spend, and thus they are able to "stimulate" the economy even further. Could this be the second stimulus package that some have been calling for?

While there are several reports coming up next week on the Producer Price Index (PPI), housing starts, and manufacturing, the focus will ultimately come back to oil and the dollar.

Anything that moves the dollar up will force oil lower and vice versa. This will be something to watch in the coming weeks.

Sources: Yahoo, MSNBC, Reuters

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