There are many policymakers in the current White House who’ve silently supported a weaker dollar policy for the second term of the Bush Administration. This, the argument goes, helps support U.S. exports. True, but the downside risks today are percolating on many fronts. One can make a solid case that the common thread, which weaves through the financial markets today, is the weak dollar.
President George W. Bush was quick to criticize the 13 members of OPEC this week for not increasing oil output at their meeting in Vienna. That may be politically palatable but it seems to be short on economic realities. There is at most, as numerous leaders and analysts have outlined on our program, 500 thousand barrels of spare oil capacity within the cartel and that is not enough to drive prices down from their historic highs.
The culprit is the weak dollar. As a bet against dollar-based assets, global liquidity pools controlled by global fund managers have put money into the oil market. So the record prices we are seeing today are in part driven because these managers are looking for a more attractive return for their money.
A similar story is playing out with the hard commodities – gold, platinum, silver, iron ore. The $100 barrier for oil has been broken and gold appears to be on its way to the $1000 an ounce with its record run.
Don’t get me wrong; pressure from the developing world is intense. Countries within the broader Middle East are growing nicely and this is true from Dubai to Shanghai, from Kiev to Kuala Lumpur. As this band of growth from the Middle East to the Far East continues to expand, the pressure for the entire basket of commodities will continue to grow. But a strong dollar policy based on sound budget management in Washington would likely take out the top 20 percent of these record highs.
Keep tapping the wealth
There is a less obvious, sidebar story that has been a result of the soft dollar policy and that is the hunt for better returns by the giant and still growing sovereign wealth funds of the Gulf countries. When the dollar was solid, these funds were quite happy to park their money into the U.S. dollar and U.S. bonds. That is not the case anymore. With the coffers overflowing from $100 oil, they are re-deploying their assets around the globe, in U.S. and European equities, property deals and utility companies.
This had many crying foul, but the rhetoric this week toned down considerably. As European Commissioner Charlie McGreevy noted on our program, the debate changed a great deal in the last year. “From being looked upon as, I say 'pariahs' as it were, a year ago. I think people are now looking at it in a more balanced way and I think we've had a more balanced discussion now then we would have had one year ago.”
This is true in part because Europe and the U.S. actually need the funds as almost lenders of last resort. As a result, both the European Union and the U.S. Treasury are both talking about a voluntary code of conduct for sovereign wealth funds. The Gulf money managers I have spoken to scratch their heads and wonder out loud what that means in practice. But again, a whiff of cooperation seems to be in the air. The Chief Executive of Dubai International Capital Sameer Al Ansari said this week: “There’s little question that there needs to be more transparency.”
While a center ground is being found, the funds garnered a big vote of confidence from Warren Buffet who moved to the number one slot on the Forbes wealthiest people list. Buffet pointed the finger back to Washington: “This is our doing. Our trade equation guarantees massive foreign investment.”
As the Oracle of Omaha noted, the weak dollar may have helped sell goods abroad, but it has meant that, not only does the trade balance need to be financed, all the other products up for sale – especially banks and buildings – look like a bargain.
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ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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