S E P T E M B E R 2 0 0 8 I S S U E
The Big Question
Is That a Euro in Your Pocket?
"People are talking a lot about the price of oil. But they fail to realize that half of the run-up in oil price is the result of the weak dollar. At the start of 2002, oil was trading at about $20 a barrel and today's price is around $125 a barrel. The dollar's decline against the euro has accounted for almost $54 of that price increase. This is huge.
"As an applied economist and trader, I build alternative scenarios that might affect exchange-rate movements. I then assign probabilities to each scenario. Today, any trades involving the dollar are very risky. There are plausible scenarios suggesting the greenback will bounce back from its cyclical lows. There are also plausible scenarios suggesting a collapse — particularly since we will have a new president next year, and in economics and finance, both candidates are as light, or lighter, than our current lightweight commander-in-chief.
"The current risks associated with anticipating the future of the greenback explain why I have not traded the dollar for some time and instead have focused on cross-trades that involve buying the Australian dollar and simultaneously selling the New Zealand and Canadian currencies."
Steve H. Hanke is professor of applied economics in the
Whiting School of
Engineering, co-director of the
Applied Economics and the Study of Business Enterprise
at Johns Hopkins, a senior fellow at the Cato Institute,
and a columnist for Forbes magagazine.
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