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Toward the Oil-Dollar-Fed Rollercoaster Ride

August 21, 2015 • GLOBAL ECONOMY, FINANCE & BANKING, Americas, Dan Steinbock, Global Capital Markets

By Dan Steinbock

The fluctuations of the oil prices, the Fed’s policy rate and the U.S. dollar are intertwined. In fall 2015/spring 2016, the Fed’s impending rate hikes will cause substantial turbulence in emerging markets.

Until recently, oil prices were recovering. However, after rallying earlier in the year, oil plunged nearly 20 percent in July (and briefly fell below $47 per barrel). In the past, that has often heralded the coming of a bear market.

Since oil is a dollar-denominated commodity, the timing of the impending interest rate hike by the U.S. Federal Reserve has a significant impact on the U.S. dollar and thus on oil prices. Monetary hawks would like to see the Fed raise short-term interest rates by September, whereas doves argue that the international environment is far too fragile and such a move could have an adverse impact on the lingering U.S. recovery and world markets overall.

Still others warn about the adverse consequences of premature rate hikes. This is why the International Monetary Fund (IMF), in early June, warned the Fed to delay the rate hike until 2016; until there are sure signs of a pickup in wages and inflation.

 
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