As the dollar goes…

When US presidential candidate John McCain announced he would balance the US federal budget within his first term of office, not many people took him that seriously. For one thing, given the profligate deficit spending that has mounted during the last eight years under George W. Bush, such a feat would difficult if not impossible. Second thing, few people expect McCain to be elected at this point due in part to his disastrous pick for a running mate, Sarah Palin.

Still, if the US were to revert to fiscal sanity under the next administration, it would do wonders for the recovering strength of the dollar, which surged to a multi-year high against the British pound and the euro yesterday. It would also have a knock-on effect on Gulf economies, whose currencies are linked to the dollar.

Here’s the catch. With the US economy in a pitiful state, the dollar’s rise has little to do with a strengthening of US economic fundamentals. It’s simply that the rest of the world is getting weaker.
A sell-off in commodities, meanwhile, has pushed down the price of oil. Everybody, it seems, fears there’s a global recession around the corner.

Don’t be fooled by the rising dollar, says David Gilmore (no relation to the Pink Floyd guitarist) of Foreign Exchange Analytics. The analyst told Associated Press: “The global deleveraging of markets is forcing a run into the yen and the dollar, which are arguably the two cheap funding currencies from the credit boom. I’d be hesitant, however, to assert that somehow the strength of the dollar reflects a global surge in confidence in the U.S. economy and U.S. markets. This is a rally in the U.S. currency that is a sign of stress, not a sign of relief.”

Everybody’s going down, in other words. How depressing.
But – watch out for China. As The National reported today (skip to the second half of the article), future oil prices will depend much on whether Chinese demand drops along with the global economic downturn. That hasn’t happened yet and nobody’s quite sure it will, with much depending on whether China’s government will cut subsidies.

Now imagine if Chinese oil demand continues to rise while the dollar continues to strengthen. Such a combination could prove to be hugely beneficial for Gulf economies, be it with a President Obama, President McCain, or – heaven help us all – President Palin.