Done in by the dollar

• Article
• Comments ()
• Click-2-Listen

By

Just when you thought it couldn't get any worse than paying $3.58 for a gallon of gasoline comes this bombshell prediction from investment bank Goldman Sachs on Tuesday: The price of crude oil — buoyed by the dollar's continued free fall — could rise 66 percent to $200 a barrel within two years.

This would trigger massive price hikes at the pump, a disaster for a consumer-driven American economy already shaken by crises in the housing and credit markets. Fortunately, its emergence is not a foregone conclusion. Congress, the Fed and the Treasury, charged with keeping a stable currency, can drive down the price of oil and alleviate the pain for American consumers by making a commitment to stabilize and strengthen the dollar.

The greenback's struggles are largely attributable to the housing devaluation, a constriction in credit and a fear that a Democratic president and Congress will raise taxes, increase regulation and increase spending in America. In addition, the interest-rate cuts the Fed has undertaken have helped to weaken the dollar. Low interest rates, which make borrowing easier, flood the markets with cheap dollars that weaken the currency. Meanwhile, the inflation-weary European Central Bank has kept interest rates high. Since early 2007, the dollar has dropped 17 percent against the euro, and 13 percent against the Japanese yen. The euro not long ago surged to an all-time high of $1.6018. Everything in America seems to cost more these days. That is, unless you're a European tourist.

But why the close link between the slumping dollar and the price of oil and commodities? Weak-dollar induced inflation has spurred investors and speculators in the futures markets to "go long" on oil and commodities and "short" on the dollar. In other words, investors are pulling their money out of the U.S. currency and plowing it into oil and other commodities. This phenomenon grows fiercer with each whisper of a looming Fed interest rate cut. Its effect on the price of oil at the moment rivals that of political instability and growing demand from the developing world. In fact, the arc of the dollar has been roughly the inverse of oil and commodity prices.

In order to stem the dubious cycle in the futures markets, investors need to know that the United States is dedicated to a stronger dollar. One way the Fed can start is by taking a bolder stand in setting the federal funds rate. The United States also could send a powerful signal by encouraging the G-7 nations to buy back dollars off the open market or lower their own interest rates.

There is, of course, another way to help the dollar: Congress can implement pro-growth policies that improve America's ability to attract foreign direct investment (FDI) and stimulate the economy.

In the second half of 2007, flows of FDI into the United States slowed to a crawl, falling by about 50 percent to $623 billion. This is partly a function of the slowing economy. But it also stems from increased competition abroad. As U.S. businesses chafe under average top corporate tax rates of 39 percent — the 29th highest rate in the 30-member Organization for Economic Cooperation and Development — the world is moving at a torrid pace to slash corporate rates and other barriers to investment. That, combined with improved training and education around the world, has opened up several viable alternatives for investors to put their capital. Cutting our corporate tax rates will trigger a wave of investment, providing a much-needed shot in the arm to job creation, the sagging dollar and the overall economy.

At a time of near recession, $200 a barrel oil would paralyze our economy and delay our recovery. Congress, working in conjunction with the administration and our allies, must use the resources at our disposal to revitalize our economy.

Rep. Eric Cantor (Virginia Republican) is chief deputy whip in the U.S. House of Representatives and a member of the Committee on Ways and Means.