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Why high oil prices could knock down the U.S. dollar Add to ...

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How oil will affect U.S. dollar Higher oil prices sparked by the turmoil in the Middle East and North Africa will probably drag down the U.S. dollar , though at a more tempered pace than during prior bouts of tension, Nomura Securities says.

"Recent memories suggest that higher oil prices are bad news for the dollar," Jens Nordvig, Nomura's head of currency strategy in New York said in a research report today.

"First, we have been used to a generally negative correlation between oil prices and the dollar since around 2004. This was especially the case in the first part of 2008, when the correlation between EUR/USD and Brent reached very high levels. Second, past episodes of tension in the Middle East suggest that the dollar tends to weaken when there are oil supply shocks. This was the case during the first Iraq war in 1991 and in the run-up to the second Iraq war in 2003."

Mr. Nordvig cited three reasons for a weaker greenback amid surging crude prices:

The U.S. economy is more "energy intensive" than most other countries in the developed world, a larger importer than the euro zone, which means terms of trade deteriorate more.

Oil-exporting countries garner more revenue amid rising prices. "If a significant proportion of additional revenue is allocated into non-dollar currencies, the net impact can be [U.S. dollar]selling."

Oil shocks affect monetary policy differently in various countries. While the European Central Bank, for example, puts its focus on overall inflation, meaning pressure to raise interest rates as energy prices rise, the Federal Reserve focuses on core inflation. Given that that measure excludes energy, oil prices "are not a primary concern in relation to monetary policy."

But, Mr. Nordvig added, markets shouldn't get "over-excited" because past correlations were skewed by various developments.

"On balance, higher oil prices are negative for the dollar," he said.

"But the sensitivity of the dollar to oil prices may be less than in 2007 and early 2008 when petrodollar flows were strongly supportive of the euro. The dollar's sensitivity to the oil price shock may also be less than in previous episodes of tension in the Middle East, when dollar weakness was exacerbated by U.S. military involvement.

"... For now, the spike in oil prices is clearly an obstacle to the dollar bounce we have been looking for. That said the U.S. economic data picture remains very robust, and we continue to see positive U.S. data surprises over the next 2-3 months as a potential catalyst for [U.S. dollar] gains once the tensions in the oil-producing regions have calmed down."

Oil prices spark fears Oil prices surged again today, sparking fears over inflation and the impact on the challenging global recovery. The benchmark U.S. price, West Texas Intermediate, or WTI , topped $100 (U.S.) a barrel for the second day in a row, while Brent crude jumped closer to $120 as violence in Libya curtails production.

Prices at the gas pump surged as well.

"Comments from senior Saudi sources that Saudi Arabia is willing and able to supply high quality light oil to replace Libya's disrupted supply have eased some of the pressure, though both WTI and Brent are still up 12.5 per cent since the Monday open," said Elsa Lignos, currency strategist at Royal Bank of Canada Europe.

Up until the unrest in Libya, oil markets had not been overly concerned by the troubles that spread from Tunisia to Egypt and other countries in the region.

Libya accounts for 2 per cent of global output, and investors are fretting over the potential for the turmoil to reach Saudi Arabia, the world's biggest crude exporter. According to Eni of Italy, Libya's biggest producer, some 1.2 million barrels a day of oil production has been lost already because of the turmoil, The Associated Press reports.

"Up until now, the reaction to the situation in the Middle East has been broadly positive, with markets shrugging off news of violent protests in the hope that regime changes will be beneficial to the countries involved," said Will Hedden, sales trader at IG Index. "The scale of the Libyan conflict, however, and worries that unrest could spread to the oil producing giant of Saudi Arabia, have now hit home."

Analysts warn the consequences could be severe, some suggesting crude could hit $200 or more should Saudi Arabia be affected, potentially killing the global economic rebound.

"I believe we are getting closer to the point where the surge in oil prices could tip the global economy back into recession (we may have already reached that point anyway)," said David Rosenberg, chief economist at Gluskin Sheff + Associates.

"My reading of Wall Street research shows that the trigger point for recession calls would be somewhere around $120 a barrel. As it stands, both the move in the oil price on a two-year basis and the current level in real terms suggest that the 'odds' based on past performance would certainly be better than 50-50 as it pertains to the U.S. economy in any event."

Douglas Porter, the deputy chief economist at BMO Nesbitt Burns in Toronto, charted the various spikes in oil prices since the 1970s, noting that by yesterday, WTI crude had soared 150 per cent from levels two years ago, and Brent 160 per cent.

"This puts the steep run-up in energy costs in the same league as oil shocks of the past, which have often contributed to, or caused, serious economic challenges in the U.S. and global economies," Mr. Porter said. "... There are some mitigating factors this time - prices started in a deep, deep hole two years ago - but the price spike likely means that the cycle of upward revisions in U.S. growth prospects has just come to an abrupt halt."

The Financial Times reports today that Saudi officials are talking to European oil concerns about boosting production to help cover what has been lost in Libya. The move, the newspaper said, is a strong sign that Saudi Arabia is poised to increase output to help keep prices in check.

SNC suspends some Libyan work SNC-Lavalin Group Inc. says it has suspended work on some of its Libyan projects and secured the safety of all its employees there.

"We understand that since this is a complex situation, many people may be wondering about what is happening," the company said in a statement yesterday. "Please know, however, that we are doing everything in our power to evacuate our personnel in a safe manner and to be certain of putting no one in any danger. We do have a plan to do so but due to security issues, it must remain confidential. We remain in contact with our employees and their families, and support them through this difficult time."

The engineering and construction multinational is working in Libya and airport and water projects, among others.

Uh, oh ... Saskatchewan's premier, who was so instrumental in killing a proposed takeover of Potash Corp. of Saskatchewan , said today his government plans to review the proposed marriage of TMX Group Inc. and London Stock Exchange Group PLC.

Brad Wall's plans, announced in a speech in London, according to Bloomberg News, mark the latest in a series of hurdles for the merger, and Ontario, home to the Toronto Stock Exchange, is making a lot of noise.

Mr. Wall said his province has "skin in the game" on the marriage, which would create a powerhouse for resource companies.

CIBC beats estimates Canadian Imperial Bank of Commerce topped analysts' estimates today as profit rose nearly 23 per cent in the first quarter, driven by earnings at its retail banking operations and lower loan-loss provisions.

Canada's fifth-largest bank reported profit of $799-million, or $1.92 a share, compared to a profit of $652-million, or $1.58 a share, for the same period a year ago, Globe and Mail banking writer Grant Robertson reports.

Excluding one-time items, the bank's profit was $1.97 a share, about 20 cents a share higher than what analysts were forecasting.

National Bank sees record profit National Bank of Canada also posted better earnings today, with first-quarter profit jumping to a record $312-million, or $1.80 a share, compared to $215-million or $1.22 a year earlier.

Business group withdraws complaint against Moneris The Canadian Federation of Independent Business has withdrawn its complaint against Moneris Solutions Corp., which it had lodged with a federal regulatory agency, after the payment processor agreed to give thousands of retailers more time to assess the impact of upcoming credit-card fee changes, The Globe and Mail's Rita Trichur reports today.

Last week, the CFIB formally complained to the Financial Consumer Agency of Canada and Finance Minister Jim Flaherty's office about the way Moneris was notifying thousands of merchants about coming changes to the fees it charges for processing credit cards.

Caisse posts hefty return The Caisse de dépôt et placement du Québec posted a 13.6-per-cent return on its investments last year, solidifying its continuing recovery from a disastrous 2008 loss, The Globe and Mail's Bertrand Marotte reports from Montreal.

The results for 2010 beat the 11.25-per-cent median return of large pension funds in 2010 as estimated by RBC Dexia Investor Services Ltd.

Canada's largest public pension fund manager said it outperformed its own benchmark index by 4.1 per cent for the year ended Dec. 31, 2010.

New president for Loblaw Loblaw Cos. Ltd. today named a new president to replace Allan Leigton later this year.

Vincente Trius is a seasoned international retail executive who will move to Canada in the coming months and join the company in the second half of the year, Globe and Mail retail writer Marina Strauss reports today.

Mr. Leighton, who arrived at Loblaw as deputy chairman in 2006, is a British retail veteran who has spearheaded Loblaw's turnaround over the past four years.

Loblaw's announcement today came as the giant grocer also reported its fourth-quarter profit fell to $151-million or 54 cents a share from $165-million or 60 cents a year earlier. Sales slipped to $7.16-billion from $7.31-billion.

"In the year ahead, we expect to continue our focus on executing the plan in a market environment that remains unpredictable and competitively intense," Loblaw executive chairman Galen G. Weston said in a statement.

GM returns to full-year profit General Motors Co. , born again after sinking into bankruptcy protection and given life support from U.S. and Canadian governments, today posted its first full-year profit since 2004.

The giant auto maker, now trading publicly again, said it earned $4.7-billion (U.S.) for the year. Fourth-quarter profit, shy of expectations, was $510-million.

"Last year was one of foundation building," chief executive officer Dan Akerson said in a statement. "Particularly pleasing was that we demonstrated GM's ability to achieve sustainable profitability near the bottom of the U.S. industry cycle, with four consecutive profitable quarters."

Maple Leaf Foods profit climbs Maple Leaf Foods Inc. profit climbed in the fourth quarter to $30.2-million or 22 cents a share, from $21.9-million or 16 cents a year earlier. Sales, though, slipped to $1.21-billion from $1.32-billion.

"Maple Leaf Foods delivered strong earnings growth in the fourth quarter, despite a sharp increase in raw material prices," said chief executive officer Michael McCain.

"These results reflect the benefits of cost reductions and price increases intended to help us keep pace with global food inflation, and some early benefits from the initial execution of our strategic plan. We expect the progress we are making in reducing our cost structure, simplifying our product lines, and streamlining our operations will contribute to earnings throughout 2011."

Magna shares plunge Shares of Magna International Inc. plunged today in the wake of the giant auto parts maker's earnings report late yesterday.

Magna swung to a fourth-quarter profit of $216-million (U.S.) or 88 cents a share, rebounding from a loss of $139-million or 62 cents a year earlier. Sales climbed to $6.6-billion from $5.4-billion, and the company boosted its quarterly dividend by 39 per cent to 25 cents.

UBS Securities Canada analyst Tasneem Azim, noting Magna missed her estimates and those of other analysts, cut her 12-month price target on the stock to $64 from $72, saving her estimates for earnings per share by an average of 13 per cent.

"Our buy rating remains underpinned by attractive valuation, strength in the volume recovery outlook, and the potential for cash redeployment into earning-accretive acquisitions or increased dividends," she added.

Well-being in Britain Britain's Office for National Statistics is asking some 200,000 people to rate their "life satisfaction" on a scale of one to 10, part of its program to measure well-being.

In April, the agency is launching a new well-being measure, whose goal is to "provide a fuller picture of 'how society is doing' than is given by economic indicators such as GDP alone."

The group today unveiled four questions it will begin asking on its Integrated Household Survey, which it said it pulled together from experts and other organizations. The questions seem a little odd, and one wonders how the responses will look given high unemployment and austerity measures after the recession.:

  • Over all, how satisfied are you with your life nowadays?
  • Over all, how happy did you feel yesterday?
  • Over all, how anxious did you feel yesterday?
  • Over all, to what extent do you feel the things you do in your life are worthwhile?

My answers for today, if they were asking me:

  • Satisfied, but need to cut my credit card debt, stop looking at my BlackBerry every time it quivers, and watch more television. And my youngest daughter Charlotte turned 16 today, so I'm feeling my age.
  • Let's see ... Had to start early and work late, but then took my daughter Molly for dinner, so overall happy.
  • Seriously? I write for an online audience on breaking news, along with the fact that The Globe and Mail has daily deadlines.
  • That depends how many people are reading this.

Boyd Erman's Morning Meeting CIBC's wholesale division produced higher first-quarter revenues from capital markets than a year ago, but a little less from corporate and investment banking, Streetwise columnist Boyd Erman reports today.

In Personal Finance today

Personal finance columnist Rob Carrick asks: in all the commotion about high consumer debt levels, where are the banks? A new task force is asking the same thing, calling for a change in the culture of borrowing and putting the onus on banks to accept more responsibility.

Whether you are investing directly or indirectly in property, you need to know the factors that affect its value.

There are ways to stickhandle around double-tax whammies when handing down your hard-earning investments, writes tax pro Tim Cestnick.

From today's Report on Business

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