Market conditions are a bit volatile these days, so it makes sense to diversify, right? But how do you protect yourself against the rapid rise of oil prices and the sinking dollar? Perhaps if we fix the dollar, a lot of other problems might disappear or at least be eased. The price of oil has literally put the brakes on the our economy and since oil is traded in dollars, would it make sense to strengthen the dollar? As the value of the dollar declines against other currencies, oil rises. When the dollar shows strength against other currencies, oil has declined.
So why not strengthen the dollar as the quickest way to bring down oil prices? I wish it were that simple. Strengthening the dollar has its dangers, because the actions necessary to boost the dollar may hurt the economy in the short run. The dollar could be strengthened by the Federal Reserve Board raising interest rates. We have been in a cycle of the Fed lowering interest rates in hopes of improving liquidity to our financial institutions , but the raising and lowering of rates is a difficult balancing act. Lower too much and you get inflation, raise too much and the economy grinds to a halt.
So what is the solution? Right now the Fed is in a bind. Raising interest rates would lift the dollar,which would in turn bring down the price of oil. It would also ease the strain of our balance of payments deficit and head off inflation. But higher interest rates might just push us into recession and cause further declines in the stock market.
So what should the Fed do? I say take the chance and raise rates 1/4 point. The current price of oil is causing serious problems with our economic recovery. We as a nation have been through recessions before and no doubt we will go through more economic downturns in the future as the price of oil continues to impact our ability to spend.
I was thinking that the executive branch could instruct the Treasury to support the dollar on the currency markets if the Fed raises rates and maybe Congress could help by cutting federal spending, but who am I kidding.
It is an election year, so we may have to get used to expensive oil. Diversification is just not as easy as it used to be.
• Carol Perry is affiliated with Carol Perry and Associates of AWA Wealth Management. She can be reached at 841-4277.