Crude Oil Sets New High Above $139; Gold Surges as Dollar Dives

By: Jason_Simpkins

Crude oil for July delivery traded at an all-time high of $139.12 a barrel on the New York Mercantile Exchange today (Friday), after the U.S. dollar nosedived on speculation that the European Central Bank would raise its key lending rate and on worries that a bigger-than-expected spike in unemployment meant the U.S. economy was far weaker than feared.

For the day, July crude oil soared $10.75, or 8.4%, to close at an all-time high of $138.54. For the week, the contract climbed 8.8% on the NYMEX.

The still-weak greenback today fell more than 1% to $1.5674 per in late-afternoon trading - its lowest point since May 28 - after employment data from the U.S. government detailed a bigger-than-expected 0.5% decline in non-farm payrolls.

U.S. stocks were pounded. The Dow Jones Industrial Average plunged 394.64 points - or 3.13% - to close at 12,209.81. The tech-laden Nasdaq Composite Index skidded 75.38 points, or 2.96%, to end the day at 2,474.56. And the broader Standard & Poor's 500 Index plummeted 43.37 points, or 3.09%, to finish the week at 1,360.68.

Troubling Trends

The U.S. payroll numbers really spooked investors. The unemployment rate jumped to a higher-than-expected 5.5% in May, up from 5% in April, as employers put 49,000 Americans out of work.

Employers have now cut payrolls for five straight months, leaving the jobless rate at its highest level since October 2004. The 0.5% rise was biggest monthly jump since 1986. The total number of unemployed has reached about 8.5 million people, up from 6.9 million a year ago when the unemployment rate was 4.5%, the Bureau of Labor Statistics reported.

The unemployment rate is expected to reach at least 6% by early next year.

The dollar's decline Friday followed an equally dramatic tumble Thursday, when the greenback fell 1% on news that the European Central Bank (ECB) hinted at an increase in the European Union's main financing rate.

"It is not excluded that, after having carefully examined the situation, that we could decide to move our rates a small amount in our next meeting in order to secure the solid anchoring of inflation expectations," ECB President Jean-Claude Trichet said at a news conference.

The ECB has remained hawkish on inflation, holding its key lending rate steady, even as the U.S. Federal Reserve cut its benchmark Federal Funds rate seven times in a desperate bid to revive the U.S. financial-services sector while also averting a recession.

Between Sept. 4 and April 22, the dollar plummeted 14% against its European counterpart as a result of the divergence, and the $1.6019 it  reached on April 22 was an all-time low.

The Greenback "Head Fake"

After reaching that nadir, the greenback posted a slight 3% rebound, hitting a five-week high on May 2 after Fed Chairman Ben S. Bernanke signaled a pause in the U.S. central bank's rate reductions.

In a May 8 financial commentary, however, Money Morning Investment Director Keith Fitz-Gerald warned investors that the dollar rally was " a head fake of legendary proportions ."

Recent events have derailed the greenback's rally - and validated Fitz-Gerald's warning.

Friday's employment figures compounded the negative effect of Trichet's comments by fueling speculation that the U.S. Federal Reserve would be unable to reverse course and start raising rates as most analysts have been predicting without pulling the rug out from under the U.S. economy. Should the ECB raise its rate in July, the results could be devastating for the dollar, which could slip into an out-of-control spiral.

"The big shock was the rise in the unemployment number," Samarjit Shankar, a foreign exchange analyst at The Bank of New York Mellon ( BK ), told Bloomberg . "It damps the outlook for a tightening in U.S. rates and strengthens the case for $1.60 [against the euro]."

Oil and Gold Soar

Commodities, priced in dollars, soared on the greenback's freshly exposed vulnerability.

"Many investors used the latest sell-off in the dollar as an excise to get back into the [oil] market," Andrey Kryuchenkov, an analyst at Sucden (U.K.) Ltd. told Bloomberg . "Concerns that demand is flattening in the near term have been overshadowed by persistent inflationary worries."

Crude oil for July delivery jumped $5.49 a barrel, or 4.5%, Thursday before extending its gain to a record high above $137 Friday.

Money Morning 's Fitz-Gerald - one of the first investment gurus to predict triple-digit oil prices - recently boosted his target price for crude oil from the $187 level he projected back in December to a new level of $225 a barrel .

Gold climbed 2.7%, returning to the $900 an ounce mark as the dollar stumbled.   

" Gold rallied in line with moves down in the dollar. "  David Thurtell, analyst at BNP Paribas SA (OTC: BNPQY ) told Reuters .  "The worry is if unemployment is climbing, then mortgage defaults and subprime losses rise."

Money Morning today (Friday) published a research report reiterating its earlier prediction that gold prices could reach $1,500  - or even $2,000 - an ounce, thanks to the powerful global trends that are forcing many commodity prices to new record highs.

Gold is traditionally used as a hedge against financial uncertainty. It also makes commodities priced in the U.S. currency cheaper for holders of other currencies.

[ Editor's Note : Check out Money Morning on Monday for an analysis of the gold market by noted global-investing expert Peter D. Schiff - a regular Money Morning contributor - and for an investment story detailing profit plays in both the oil and gold sectors.]

News and Related Story Links:

• Bloomberg: Dollar Falls to One-Week Low Versus Euro as Jobless Rate Rises
• Bloomberg: Oil Advances on Demand for Dollar Hedge, Morgan Stanley Outlook
• Reuters: Weak U.S. jobs data spurs gold to 1-week high
• Money Morning: ECB Stands Firm Against Inflation .
• Money Morning Financial Commentary : A Currency Conundrum: Beware of the U.S. Dollar's "Head Fake" Rally .
• Money Morning Commodities Investing Series : Cashing in on Commodities: Will Gold Hit $1,500 an Ounce?
• MarketWatch. com : Gold gains over $23 to end the week higher; Prices see biggest rise since Feb. with dollar down, oil up . Money Morning Commodities Investing Series : Cashing in on Commodities: What's Driving the Oil Bull, How Much Further It Will Go, and How Investors Can Profit.
• Money Morning Special Investment Report : Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China .
• Money Morning Special Investment Report : The Five Top Plays to Profit from the Gold Boom .
• Money Morning Special Investment Report : The Baywatch Effect: Can China's Growth Help Gold Prices Triple?

By Jason Simpkins
Associate Editor

Money Morning/The Money Map Report

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