The buck drops here

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From Times staff writer Martin Zimmerman:

It’s baaaack.

The weak dollar-strong commodity trade that made a lot of money for a lot of investors over the last year seemed to be unwinding recently.

The dollar, after slumping to an all-time low of $1.60 to the euro on April 22, rallied. That helped oil pull back from its flirtation with $120 a barrel. Gold, meanwhile, fell more than 6% during April.

But the euro has rallied this week, signaling that the dollar’s doldrums may be far from over. Oil prices, meanwhile, are at record highs and gold prices are inching back.

So what’s up? Chuck Butler, president of Everbank World Markets in St. Louis, thinks it could be a simple matter of miscommunication.

The dollar gained momentum versus the euro last week after the Fed cut interest rates by another quarter-point. Many investors interpreted the central bank’s rather vague statement of intentions as a evidence it was done lowering rates for the time being.

Butler, however, calculates that the greenback is still in a long-term decline versus the euro that began in February 2002, when a euro was worth a mere 87 cents. Last week’s mini-rally was just a head fake.

‘There can be blips like we saw last week, but the overall trend of a depreciating dollar is still in place,’ Butler says.

Her thinks investors took a second look at the Fed’s statement and realized it didn’t really provide a very clear road map of the group’s intentions regarding future interest rate moves. In addition, Butler noted, the European Central Bank is meeting this week and signs point to further hawkishness from that quarter — meaning the euro should continue to find favor with investors vis-a-vis the dollar.

‘They’re going to keep rates unchanged,’ Butler said of Ben Bernanke’s counterparts in Frankfurt. ‘So in the end, the euro is still going to enjoy a nice interest-rate differential to the dollar.’

All of this is bullish if you’re buying oil for your portfolio, as opposed to the gas tank of your SUV. Oil is priced in dollars globally, and the weakening greenback has contributed to the recent run-up in crude, which closed near $122 a barrel today in New York trading and is up more than 8% in three days.

That has helped reignite inflation fears, which in turn have given gold a boost (as has the falling dollar).

Of course, more than just a weak dollar is to blame for sky-high oil prices. The same Goldman Sachs analyst who predicted a ‘super spike’ in oil prices three years ago released a new forecast today saying prices could hit $150 to $200 a barrel in the next two years. In addition, speculators are adding at least 20% to the price, Butler figures, and consumers in places like India and China seem ready to buy any oil that may be freed up by a drop in demand from shell-shocked American drivers.

In other words, the current round of commodity inflation seems to be very much alive and well.

Money & Co. blogger Tom Petruno is on vacation this week. He returns May 12.