Transcripts

Oil Prices Slide As The Dollar Picks Up Strength

SUSIE GHARIB: As temperatures on Wall Street heated up to record levels today, oil prices cooled off somewhat. In New York trading, July crude futures fell $4.19 to settle at $134.35 a barrel. That's after climbing $16 a barrel in the previous two sessions. Experts credited profit-taking and the stronger U.S. dollar for today's pullback. Suzanne Pratt takes a look at the relationship between oil prices and the dollar.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's no secret in world energy markets that there's currently an inverse relationship -- also known as a negative correlation -- between oil prices and the U.S. dollar. Recent trading clearly illustrates it. As the dollar rose today against the euro for the first time in three trading sessions, oil prices fell sharply; while on Friday, as the dollar fell sharply, oil prices surged nearly $11 a barrel. Persistent concerns about supply-demand fundamentals are at the heart of the rally in oil prices. But when the dollar is weak, commodities that are denominated in dollars become less expensive to buy for those using other currencies. Oil trader Ray Carbone says the relationship is most powerful when oil is in rally mode.

RAY CARBONE, OIL TRADER, PARAMOUNT OPTIONS: I think it's just a psychological reason that money flows into commodities a little bit faster when the dollar is weak than it flows out when the dollar is strong.

PRATT: Since January, the price of oil has surged nearly $40 a barrel or about 40 percent. In the same time frame, the dollar has fallen about 7 percent against the euro. Exactly which one is impacting the other is a matter of some debate, a chicken or egg conundrum. HSBC currency strategist Bob Lynch considers it only a perceived relationship.

ROBERT LYNCH, CURRENCY STRATEGIST, HSBC: I use the term perceived linkage specifically because while it's very easy and we read it quite frequently to see that weakness in the dollar is actually pushing oil prices higher, the statistical relationship is not at all that clear.

PRATT: Perceived or real, oil experts are still closely watching developments in currency markets for clues about oil prices. Today, the dollar rallied from a six-week low against the euro as Treasury Secretary Henry Paulson said he would never rule out currency intervention. And many currency experts predict the dollar will recover later this year.

LYNCH: The credit crisis will subside. The stresses in the financial system will begin to subside and even though we're just getting started in terms of the bad news in the real sector data, in the economic data, that too, should begin to bottom out as the year progresses. And then finally later this year, we should be looking at a stronger dollar, certainly stronger than it is today.

PRATT: Exactly what happens to the dollar in the near-term may largely depend on European interest rates. If the European central bank raises rates this summer, the dollar is widely expected to weaken further. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.