Oil prices jump as dollar tumbles

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KAI RYSSDAL: The American economy sorta had its own D-Day today. Forget for a little while the fact that the Dow lost almost 400 points. We’ll get to that later on in the broadcast. What we all woke up thinking was gonna be *the story of the day…unemployment…got short-circuited by oil. Crude topped 139 dollars a barrel at its high today. Closed up 10 dollars 75 cents. A couple of things happened to bring that about. An analyst at Morgan Stanley decided to make some news…came out and said oil’s going to hit 150 a barrel by the 4th of July. That got the speculators going. And the head of the European Central Bank started talking about raising interest rates on the other side of the Atlantic. Marketplace’s John Dimsdale has more.

JOHN DIMSDALE: As oil prices marked their largest two-day increase in history, John Kingston was left scratching his head. He tracks oil for the energy information company Platts.

JOHN KINGSTON: You don’t move up $14 a barrel just on fundamentals when fundamentals haven’t changed in 48 hours. But clearly there’s been such a walloping of the dollar today. That is what’s driving this over the last few days. Because there is really nothing else in the market right now that would indicate that there’s a reason why oil should resume its growth.

The Federal Reserve Board’s recent effort to talk up the value of the dollar was drowned out yesterday when the president of the European Central Bank dropped a big hint that he’ll raise interest rates to fight inflation. Fed watcher David Jones:

DAVID JONES: That, of course, caused the dollar to fall, the euro to increase. And once again, the traders in a knee jerk way sold or shorted the dollar and bought crude oil.

The traditional way to boost the dollar’s value is to have the Fed raise interest rates. But the weaker dollar is helping U.S. exports. Besides, most of the Fed Board members oppose higher rates, says Bank of America economist Mickey Levy.

Mickey Levy: Housing is still subtracting a lot. Financial markets are, of course, fragile. And the economy has slumped and the unemployment rate is rising. Historically these are not conditions where the fed raises rates.

All of which points to continued higher oil prices. Goldman Sachs, Wall Street’s most active investor in energy markets predicts $200 per barrel oil within two years.

In Washington, I’m John Dimsdale for Marketplace.