Nov 25

The US is getting more expensive for Europeans

Due to the economic slowdown the demand for oil dropped and as a result the euro decreased rapidly in value. You may question why this happens, but is is caused by investors that hedge their currency risk by using $ to buy $-based commodities like oil. In the first half of 2008 oil prices were increasing and the dollar was losing ground against the euro. Investors bought oil to limited their exposure to Euro/$ fluctuations. 

Euro / $ - graph

Euro / $ - graph

We now clearly see the opposite happening (due to the decline in oil prices) inventors rushed out of oil which triggered a rapid increase in demand for $. Basic economics tell us, more demand will very likey result in higher prices, a strong appreciation of the $ vs. the Euro. Nevertheless, the world does run out of oil sooner or later which will again lead to an increase in oil prices and a lower valuation of the dollar.

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