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News Link • Economy - International

PRESENTING: The Ultimate Oil-Currency

• http://www.businessinsider.com, Joe Weisenthal
 The Canadian Dollar (for obvious reasons) is one. When oil booms, things boom in Canada, and that's good for the Loonie. The Aussie is usually seen as another one.

But in recent years, the REAL petro-currency has not been a major oil powerhouse, but... the euro.

Wha?

Well there's a decent theoretical reason for the euro to rise against the dollar when the price of oil rises. The ECB is famously (some might say infamously) inflation-sensitive. Thanks to its German heritage, ECB chiefs are inclined to hike rates at the first hint of inflation, even when the economy is weak (as it was when the ECB hiked rates in early 2008 and early 2011). Oil of course, is a major driver of inflation.

And because rate hikes tend to be bullish for a currency, it stands to reason that higher oil prices = more inclination to hike rates = euro bullishness.

There are other factors that push oil and the euro together, such as the fact that oil revenues in the Mideast often get recycled into purchases of European products, and the fact that because the US uses more oil per capita, the US trade deficit expands faster than the Euro-wide ones during an oil price rise.

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