Rate Cut’s effect – high Oil Prices and weaker Dollar

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Sep 19 2007
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You won people – you got your interest rate cut after months of chanting, so much so that U.S. Federal Reserve Chairman Ben Bernanke admitted defeat and cut the funds rate by a whopping 50 basis points. But really, can the current new rate of 4.75 percent (from previous 5.25%) help the ailing housing sector? Was it the right move? Nobody can or dare to answer that question. The safe answer would be – time will tells. While no one knows if this is the medicine needed, the rate cut has already presented some immediate effects.

Joyful stocks investors aside, Ben Bernanke is crossing his fingers hoping for the inflation risk to remains stagnant, if not go away. Oil prices rose immediately with light sweet crude for October delivery added 82 cents to $82.33 a barrel in Asian electronic trading on the New York Mercantile Exchange by midmorning in Singapore. Did anybody just say some days ago that $80 a barrel is a temporary level and won’t last? By cutting the rate, the growth in economy will accelerate and hence the demand for already tight crude supplies will increase, at least in theory.

Rate Cut's EffectsOf course the consolation prize will be the statement from analysts that oil prices are still well below inflation-adjusted highs of $96 to $101 a barrel achieved in the early 1980s. Holy cow! Are you saying the oil prices are going up to the mind-boggling US$100 a barrel? While this indeed will bring cheers to stocks investors who bought into oil-related counters (ahem), it might create social problems to countries which are net importer of this black-gold, not to mention the catastrophic to countries that do not have a good governance in their spending habit.

If you’ve bought into oil or energy stocks or options, today’s (Wednesday) inventories data to be released by the U.S. Energy Department’s Energy Information Administration (EIA) will be the key measurement that will determine if you would make good profit. Analysts surveyed by Dow Jones Newswires expect the EIA to show that crude inventories dropped an average of 1.5 million barrels in the week ended Sept. 14, while gasoline supplies fell by 1.3 million barrels. If so, you’ll see oil stocks to soar.

On the other hand, the dollar tumbled to a new all-time low against the euro and other regional currencies including Malaysian ringgit. As the gap narrow, funds might flows out from the U.S. looking for better place to park. Malaysia ringgit already registered its biggest gain since 18th June, traded at 3.4580 to a dollar after the rate cut. This sure brought the much needed relief to the Malaysian government who was worried sick of the falling stocks prices. It hopes foreign investors will restart buying local shares, at the same time allows the government to sing the song of praise right before the next general election.

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