Title in question, and probably will end up in Great Debates, but I was wondering why this happens. Why does the increasing world demand for a limited supply of oil not affect, say, Sterling or the Euro as badly as it does the U.S. dollar? Or is the rise in the dollar price of oil an effect rather than a cause of the falling dollar?
IIRC, the US uses nearly twice as much oil per head of population than most European countries, so the US economy is affected more by increased oil prices.
I’m not an economist, but I’m curious if there’s a lag between the dollar falling followed by other currencies in a ripple effect.
And I agree with the immediate effect being because the US consumes so much oil.
While it is true that the rising price of oil causes the dollar to plummet, there are other thigns effecting the price of the dollar, too, including a huge current account surplus and the lack of savings of the average American. Conversely, many of the EU countries are running a current account surplus or have higher savings rates. In addition to the disparities brought about by the price of oil, there are otehr additional disparities.
In other words, if oil were the only thing changing, the dollar would still tank more because the US uses more. If the price of oil were to stay the same, the dollar would still sink more because of savings rates and current account deficiets. Between the two there is a pronounced move on the part of the dollar, and probably (although I am not sure) greater than that produced by the sum of hte two.
You’ve got it the wrong way round. The falling dollar causes the price of oil (and gold etc) to rise in US dollar terms. The price of these commodities stays roughly the same in Yen, Euros, Pounds, etc - all else being equal. The reason is that these commodities are priced in US dollars. But most of the customers - bidding for these goods on the market - bid up the price (in US dollar terms) when the US dollar falls. They’re paying the same for a gallon of gas or an ounce of gold in their own currencies.
Same things happens with asset prices (property and stocks) here in HK when the USD (and hence the HKD, which it’s pegged to) falls - our property and stock markets go up. But they’re staying the same in terms of all currencies on average (again, all else being equal).
So, given that Hemlock is correct, the real question is why is the dollar tanking. The US government is currently borrowing money (increasing the budget deficit) without curtailing spending or taking any prudent fiscal measures. In fact, our president is promising to cut revenues (taxes). So we can expect less income to fund our debt (to put it in terms similar to those of an ordinary borrower). Now some of our biggest lenders, countries like China and Russia, are considering putting their savings into Euros. This would cause further downward pressure on the dollar.
Now to some extent a weak dollar can be good, as it makes our exports more affordable. But beyond agricultural products we don’t export much stuff anymore. If the dollar drops too much it can cause a panicky sell off of dollars, which will cause us to have to issue more debt at a higher cost, which I believe will be inflationary.