OPEC President Chakib Khelil Monday blamed the U.S. Federal Reserve for sky-high oil prices, The Associated Press reported, adding that surging prices are not likely to decline.

Khelil said he believes the declining dollar has pushed oil higher and that the Fed's interest rate reductions to boost the U.S. economy are the primary reason for the dollar's decline, the AP reported Monday.

In an effort to jump-start the U.S. economy slowed by the nation's worst housing slump in a generation, the Fed has cut short-term interest rates by 325 basis points to 2% since September 2007.

Khelil's comments did not push oil higher as of early Monday afternoon. Oil traders looked past those comments and focused on the dollar's rise for the day versus the euro and pound, and new data points suggesting a deeper, longer U.S. recession, energy trader Jim Dietz told BloggingStocks Monday. Oil fell $3.70 to $141.59 per barrel, with futures hitting a daily low of $140.15 earlier in the day.

Oil traders adopt 'defensive' stance

"Right now the oil market is focused on the U.S. economy not OPEC's comments, and many were spooked by the Freddie Mac and Fannie Mae announcement. Everything is in pullback mode now, oil, stocks, gold, other commodities. The mood is defensive...preserve capital, basically," Dietz said.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) may have to raise up to $46 billion and $29 billion in capital, according to Lehman Brothers (NYSE: LEH), Bloomberg News reported Monday. Fannie Mae fell $3.17 to $15.61 while Freddie Mac declined $2.51 to $11.99 in Monday afternoon trading.

The dollar rose to its highest level in more than a week Monday morning on talk leaders at the G-8 summit in Japan will support the currency in an attempt to halt rising commodity prices.

The dollar strengthened about one-half cent versus the euro to $1.5629 and about 1 cent versus the British pound to $1.9659 in Monday morning trading. The dollar also rose about one-half yen to 107.66 versus Japan's yen.

Ian Stannard, a senior currency strategist at BNP Paribas SA (NASDAQ: BNPQY), France's largest bank, told Bloomberg News Monday that support for the dollar in the form of verbal invention continues, driven by the thesis that a stronger dollar, globally, is in everyone's interest.

Many economists agree that a falling and weak dollar has been a factor in rising commodity prices. Oil and other commodities tend to rise when the dollar falls as investors / traders seek to preserve purchasing power of the decreased value of dollar-denominated commodities by bidding their price up. However, economists differ regarding the extent of the weak dollar's commodity-inflation impact, with some arguing it is only a mild factor.

'Actions speak louder than words'

Further, economist Peter Dawson told BloggingStocks Monday, dollar bulls should not feel too emboldened by a verbal stance by the G-8.

In a move that surprised almost no one, the European Central Bank increased its key interest rate, the refinance rate, a quarter point to 4.25%. The increase brings the refinance rate to its highest level in seven years.

The currency market, which for the most part had already factored-in the ECB rate increase, did not react initially following the decision. The euro was virtually unchanged versus the dollar at $1.5882.

The other major currency pairings also held their ground. The dollar was unchanged against the pound at $1.9884 and the dollar rose slightly, up 0.10 yen to 106.25 yen, versus Japan's yen.

Economist: Trichet 'jumped the gun'

London-based economist Mark Chandler told BloggingStocks Thursday the ECB's decision was no surprise, but that doesn't decrease his disappointment with the ECB's stance.

"I afraid I'm going to really disagree with this one. I understand where [ECB President Jean-Claude] Trichet is coming from, but he's jumped the gun from my perspective. He could have waited another quarter," Chandler said. "There's a real concern now he's going to throw Europe into a recession like America, and if the dollar continues to fall against the euro, his rate increase won't lower inflation all that much. I don't like that bargain at all."

Oil surged $4.27 to $136.20 per barrel Friday after the dollar fell and reports confirmed that Israel had conducted a military exercise that analysts say rehearsed a potential bombing attack on nuclear targets in Iran, Bloomberg News reported Friday.

The other major energy commodities also surged Friday on the news. Heating oil jumped 11 cents to $3.82 per gallon, unleaded gasoline gained 8 cents to $3.43 per gallon, and natural gas climbed 26 cents to $13.12 per million BTUs.

Short-circuited oil sell-off

Under most circumstances, oil rises when the dollar falls, as holders of oil, which is priced in dollars, raise their prices to compensate for the reduced purchasing power of the dollar. The dollar Friday was set to record 3-cent weekly declines against the euro and British pound.

Further, geopolitical events re-entered the oil stage. Israel undertook a major military exercise earlier this month that American officials say appeared to be a rehearsal for a potential bombing attack on Iran's nuclear facilities, The New York Times reported Friday.

The dollar is on-pace to record a large weekly decline Friday -- undoing last week's gains against the euro and pound -- as traders and analysts debated the likely next step for the U.S. Federal Reserve and European Central Bank.

The dollar traded at about $1.5637 to the euro Friday at mid-day, which would represent a 3-cent decline for the week, if it maintains that level by the New York close at 5 p.m. The dollar also traded at $1.9760 to the British pound, also about a 3-cent loss for the week.

Currency trader Andrew Resnick told BloggingStocks Friday concerns about rising inflation in Germany and financial service losses in the United States have caused a sentiment adjustment in the often-volatile currency markets.

A shift in sentiment

"Last week, the debate was structured around rising inflation in the U.S. and how long the Federal Reserve could hold-off before raising interest rates. That was bullish for the dollar," Resnick said. "But this week we've seen a reversal. The talk now is about [European Central Bank President Jean-Claude] Trichet beating [Fed Chairman Ben] Bernanke to the punch on interest rates, and that put a lot of traders in euro-buy mode." Resnick added that he is presently flat, or has no open currency trading positions.

The dollar Friday was poised to record its largest weekly gain versus the euro in three years, on a growing consensus that the U.S. Federal Reserve will increase interest rates soon to check rising U.S. inflation.

The dollar traded up about one-half cent to $1.5372 versus the euro early Friday afternoon - - a level that if sustained at the New York close at 5 p.m. EDT would give the greenback its biggest weekly gain since early 2005, Bloomberg News reported Friday.

The dollar also rose Friday against the other major currencies. The dollar increased about one-half cent to $1.9494 versus the British pound, and about sixth-tenths of a cent to $1.0476 versus the Swiss franc. The dollar was unchanged versus Japan's yen at 107.90 yen.

The dollar rose more than 1.4 cents against the world's other, major currencies Thursday -- its third large gain in four days -- after traders calculated that better-than-expected May retail sales will prompt the U.S. Federal Reserve to increase interest rates soon, possibly by late summer.

The dollar strengthened 1.4 cents to $1.5400 versus the euro, 1.7 cents to $1.9444 versus the British pound and about 1 yen to 107.92 versus Japan's yen on Thursday at mid-day.

Dollar bulls, subject to numerous false-breakouts during 2008, were encouraged by the most recent U.S. retail sales data. The U.S. Commerce Department Thursday announced that May retail sales rose 1%, double the consensus estimate of economists surveyed by Bloomberg News.

May retail sales surprises traders

Currency trader Andrew Resnick told BloggingStocks Thursday the surprisingly upbeat May retail sales report has not made him a dollar bull, but he's inching closer to it. "It's tough to form a meaningful conclusion with just one data point, but retail sales did take the dollar bears by surprise," Resnick said. "Most were expecting a sort of neutral number, but the May number was not neutral. If anything, it suggests the consumer, while cutting back, has not disappeared from the stage completely."

Still, the favorable May retail sales report was not enough to push Resnick decisively into the dollar bull camp, Fed rate increase this summer or not, and he remains flat, with no open currency positions presently. "We've been led down this dollar recovery road too many times, so for the sake of avoiding a red screen [trading losses], I'm flat," Resnick said. "What's that old saying? 'fool me once, shame on you, fool me twice, shame on me.' "

To paraphrase Mark Twain, if you don't like the monetary policy climate in the world's major economies, wait awhile.
Monetary policy, historically the super oil tankers of the international finance world -- slow to get in motion, with only gradual course adjustments -- have in recent times approximated quicker responses typically found elsewhere in the markets.

Up until about a week ago, the mantra was lower interest rates, liquidity to guard against the credit squeeze/crisis, with a bias toward stimulating economic growth. For example, economists and analysts generally expected the European Central Bank to (finally) lower its benchmark, short-term interest rate to stimulate the euro-zone's slowing economy.

But then last week the notoriously hawkish ECB President Jean-Claude Trichet became notoriously overt: he said the ECB would likely increase interest rates at its next meeting to check the continent's inflation rate, which like the U.S.'s, is rising due to sky-high oil prices.

Then on Monday, U.S. Federal Reserve Chairman Ben Bernanke said he'll "strongly resist" any increase in inflation expectations, Bloomberg News reported. The markets interpreted Bernanke's comments as a sign the Fed will seek to both quell inflation and limit a further decline in the dollar -- the latter itself a source of rising commodity costs and inflation. Bernanke's comments caused the dollar to strengthen Monday against the world's other major currencies -- a strengthening that continued through Tuesday afternoon. (Still, traders are reluctant to declare it a dollar rally, given the dollar's many, prior, false break-outs.)

It's Uncle Ben versus the Ferocious Fundamentals.

The dollar rose more than 1.7 cents against two other major currencies Tuesday -- a large move in the currency market -- after U.S. Federal Reserve Chairman Ben Bernanke said the world's most important central bank will "strongly resist" any dip in public confidence in stable prices, Bloomberg News reported.

Traders interpreted Bernanke's comments as renewed Fed attention to oil-induced, rising U.S. inflation, and bought the dollar, sending it higher Tuesday at mid-day. The dollar strengthened 1.7 cents to $1.5477 versus the euro, 2.1 cents to $1.9540 versus the British pound, and almost 1 yen to 107.19 versus Japan's yen.

A 'dollar skeptic'

Further, although Chicago Board of Trade futures calculate a 55% chance of a Fed quarter-point interest rate increase in its benchmark rate when it meets next on August 5, currency trader Andrew Resnick remains a doubter.

The dollar plunged Friday after Morgan Stanley said oil prices could rise to $150 and after data indicated the U.S. employment rate surged to 5.5% in May.

The dollar fell one cent versus the euro to $1.5694 and about three-quarters of a cent versus the British pound to $1.9640. The dollar also declined about one half-yen to 105.55 versus Japan's yen.

A Morgan Stanley report ended what had been a mild dollar rebound over the past week. Morgan Stanley said oil prices could rise to $150 per barrel, due to Asia's likely accelerating purchase of Middle East oil exports, Bloomberg News reported Friday. Oil surged $6.54 to $134.54 per barrel in early trading Friday, on top of Thursday's large $5.49 gain.

Also Friday, the U.S. Labor Department announced that the nation's unemployment rate surged to 5.5% in May from 5.0% in April, as U.S. companies continued to cut expenses to protect profits in the face of the economic slowdown.

So much for the (latest) dollar rally

Currency trader Andrew Resnick told BloggingStocks Friday the oil/unemployment double-whammy would be tough for a strong currency to withstand, let alone the fragile dollar.

"We were experiencing a modest dollar rally, and there were signs of strengthening dollar-bullish sentiment. The Fed may raise interest rates and oil prices up until a few days ago were trending lower on the belief global oil demand will drop off. But the dollar-bulls have been defeated again," Resnick said. He added that he was presently flat after being stopped out of dollar long positions in the euro-dollar and British pound-dollar currency pairings.

Further, Resnick said the Thursday/Friday events underscores how hard it is for the market to sustain a dollar rally in the face of dollar fundamentals that have remained decidedly negative for more than four years.

"It's the old problem of the terrible twins, the U.S. trade deficit and the federal budget deficit," Resnick said. "People had talked up the ability of the dollar to gain support on [Fed Chairman] Bernanke's interest rate pause, but the fundamentals laid waste to that sentiment again," Resnick said. "Until the deficit numbers show steady improvement, and the [U.S.] economy starts to grow, it's hard to see the dollar sustaining a rally. The economy is simply too weak right now."

The European Central Bank and the Bank of England Thursday each kept their key, short-term interest rates the same, at 4% and 5%, respectively, the banks announced.

Economists surveyed by Bloomberg News had expected both the ECB and BOE to maintain current interest rate levels.

Also, in their previous meetings, both the ECB and BOE kept their benchmark interest the same at 4% and 5%, respectively. The BOE's last rate cut occurred on 10 April 2008, when it lowered its key rate by 25 basis points to 5%.

In contrast, since September 2007 the U.S. Federal Reserve has lowered its key, short-term interest rate 5 times, or by 325 basis points, to 2% from 5.25%, attempting to jump-start a U.S. economy dragged down by its worst housing slump in a generation. Given the extensive monetary stimulus buy the Fed, many economists now expect it to at least take a pause in its rate cut cycle, with Fed Chairman Ben Bernanke recently signaling his concern about rising inflation and the decline in the U.S. dollar.

The dollar rose more than a half-cent against the world's other major currencies Tuesday morning after U.S. Federal Reserve Chairman Ben Bernanke said in a speech the Fed is monitoring the dollar's status and its unwelcome impact on rising import prices and inflation.

The dollar strengthened about one-half cent versus the euro to $1.5447 and about one-half cent to $1.9635 versus the British pound in Tuesday morning trading. The dollar also rose about 0.70 yen to 105.18 versus Japan's yen.

In a speech delivered Tuesday at the International Monetary Conference in Barcelona, Spain, Bernanke said the Fed is "attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks" to price stability and sustainable growth. Bernanke added that Fed policy will be a major factor "ensuring that the dollar remains a strong, stable currency."

Currency trader Andrew Resnick told BloggingStocks Tuesday the key phrases in Bernanke's speech were the chairman's recognition that the weak dollar is increasing U.S. inflation, both via increased import prices and commodity price inflation, including oil.

The dollar bulls have been vanquished again.

For the fourth time since the Economic Stimulus Act of 2008 was passed in February 2008, a nascent dollar rally has failed.

In Friday afternoon trading, the dollar was poised to record a 3-cent decline versus the euro for the week, to about $1.5776. The dollar has also fallen about 3 cents versus the British pound to $1.9788, and about 1.2 yen to 103.28 versus Japan's yen.

The kindling for a rally certainly existed earlier in the week: the prospect of 'the beginning of the end' of the worst of the U.S. housing market's troubles, and an interest rate decrease by both the Bank of England and the European Central Bank had emboldened dollar bulls.

It seems like everyday we are talking about the same news... rising oil prices. Today oil busted through the $135 mark and traded up as high as $135.09. Currently we are seeing oil at $133.91.

There are three main factors at work today helping push prices higher; supply concerns, global demand estimates, and once again, the weak U.S. dollar. Of the three, the weak U.S. dollar has received most of the blame recently for the run up in oil prices.

As we have discussed many times before, any time the dollar shows weakness traders will rush into commodities as a natural way to hedge against the falling dollar. That is exactly what we have been seeing for most of this year, and that has continued into today, as the dollar has continued to drop.

So much for that nascent dollar rally.

The dollar fell against the world's other major currencies Tuesday after the International Monetary Fund cautioned that the U.S. housing slump still poses "serious risks" to financial markets and ZEW President Wolfgang Franz said he thought the ECB would increase interest rates in the near future, Reuters reported Tuesday.

The dollar fell 1.2 cents to $1.5649 versus the euro, about 1.5 cents versus the British pound to $1.9642, and about one-quarter yen to 104.10 versus Japan's yen.

Earlier in the day, IMF First Deputy Managing Director John Lipksy, in prepared remarks, said the IMF still sees "serious risks" to the financial market from the U.S. housing slump -- the U.S.'s worst housing decline in more than 15 years. Lipsky said the housing slump in the world's largest economy is yet to run its course.

Meanwhile, ZEW President Wolfgang Franz jolted the currency market Tuesday by saying he thought the European Central Bank would increase interest rates in the near future.