OIL PRICES staged a remarkable volte face yesterday and renewed their challenge on the $110 level, while gold firmed as the dollar sank further against the euro.
Oil initially retreated after the latest US weekly inventories data provided further evidence of demand weakening. However, with the dollar sinking, the dip in oil prices was rapidly viewed as a buying opportunity.
Nymex April West Texas Intermediate recovered from a low of $107.07 and surged to a record $109.85 a barrel yesterday before easing back to trade $1 higher at $109.75.
ICE April Brent added 80 cents at $106.05 a barrel after hitting an all-time high of $106.39.
The euro hit a record high against the dollar after data showed growth in the euro zone remained resilient in the face of turmoil on global financial markets.
Euro-zone industrial output rose 0.9 per cent in January, outstripping expectations of an 0.3 per cent increase.
Analysts said the hefty increase was likely to strengthen the belief that the euro-zone economic slowdown might not be severe enough to outweigh the European Central Bank's concerns over rising inflation and force it to follow the US Federal Reserve and cut interest rates.
The euro rose to a record of $1.5514 against the dollar, before easing to stand up 1 per cent at $1.5490 by midday in New York.
The euro also rose 0.1 per cent to Y158.65 against the yen and climbed 0.3 per cent to £0.7661 against the pound.
Meanwhile, the dollar lost ground, giving back Tuesday's sharp gains after the Federal Reserve announced co-ordinated plans to inject liquidity into the financial markets.
The dollar rallied sharply on Tuesday as investors reasoned that the measures meant the Fed would not have to cut interest rates so aggressively after its policy meeting on March 18th.
However, analysts said investors were questioning that logic yesterday, putting more pressure on the beleaguered dollar.
David Gilmore, an economist at Foreign Exchange Analytics, said the measures were not substitutes for lowering US interest rates but were complementary to easing monetary policy. "The Fed has plenty of easing left ahead. I would be cautious about concluding the dollar is out of the woods."
Greg Anderson of ABN Amro said the fact that more dollar liquidity was now available directly from the Fed was also likely to weigh on the currency.
Meanwhile, renewed speculation that Middle East oil producers might abandon their currencies' pegs to the dollar compounded the dollar's woes.
