As the dollar has rebounded from some recently disappointing jobs news, it has pushed back against recent gains in oil prices and gold prices. A barrel of oil fell below $79 in Friday (January 15) morning trade on the New York Mercantile Exchange.

Recent demand that has reduced US crude stockpiles pushed oil prices over the $80 level, but the overall resurgence of the dollar to start 2010 has kept price levels in check. Gold and other major currencies have also been impacted by the general perception among analysts and speculators that 2010 will be a “green” year thanks to an improving US economy.

It is likely, assuming economic conditions and the jobs market improve, that the Central Bank is going to begin raising interest rates in the coming months. This increases the dollar’s yield and relative worth on the global front. A more valuable dollar naturally takes away interest in speculation for commodities like oil and gold.

Oil is a commodity often bought as a hedge against a weak dollar based on the pairing’s naturally inverse relationship. The US economy is largely reliant on foreign oil. As the dollar strengthens, speculation in oil decreases.

Another reason crude oil prices have been held in check is that global demand for crude has not increased as quickly as some previous thought. While economic stability has improved, there are still significant questions about how quickly conditions are to improve. US unemployment is still at 10 per cent, December retail sales were down, and housing sales are still modest.

Without much to generate buy-in, oil is going to be directed by dollar movement as well as potential action by OPEC to control prices. OPEC members have said they want oil prices to remain above $80 in the near term otherwise the cartel of top oil producing countries does not appear likely to significantly cut its output to push prices higher.

This leaves the dollar have a lot of control over future oil price direction, which ultimately makes the Fed a key player in oil, gold and various commodities. If the Fed decides sooner than later to hike rates to stave off potential inflation, dollar interest is going to grow. It appears global sentiment is calling for a stronger dollar, which often paves the way for speculation.

How soon the Central Bank leaders opt to increase the funds rate is likely going to be dictated by jobs growth and improvements in other key areas. Fed leaders appear comfortable to wait to ensure the economy is stable as long as inflation is manageable.

Neil Kokemuller
1:34 PM EST
Friday, January 15, 2009