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Oil, Gold Prices Jump on Fear of War; Dollar Weaker - 2002-12-24

In North America trading on financial markets has wound down for the Christmas and New Year holidays, but not before there were some fairly dramatic moves in the value of the dollar, oil and gold.

Oil has moved to a two-year high, with London North Sea Brent trading at just under $30 a barrel. Oil has risen by $5 a barrel since labor unrest began in Venezuela four weeks ago. Venezuelan output is down sharply.

Opec has set a target price of $28 a barrel for a basket of its various blends of crude. That basket has been above $28 for six consecutive days. Saudi Arabia's oil minister says the cartel's output could be raised if prices stay above $28 for 20 consecutive days.

As oil prices have gone up, the value of gold has also risen. Gold is trading at a three year high of $345 an ounce. As gold and oil have risen, the dollar has fallen. The U.S. currency is now at a four-year low against the Swiss franc and a three-year low against the euro.

Jim Smith, finance professor at the University of North Carolina and chief economist at the Society of Office Realtors, said oil has risen because of the likelihood of war with Iraq. Mr. Smith believes that if a war takes place it will last only a few weeks and that the oil price will thereafter fall sharply, perhaps all the way to $20. Professor Smith also believes that the dollar will ultimately retrace its recent losses.

"I can't for the life of me figure out why the euro is so high: Germany is in a recession, France is headed for one, Italy is in one. There's absolutely no reason in the world for the euro to be strong. It should be probably worth about $0.82-0.85. So at the current $1.02 it is wildly overvalued," said Mr. Smith. "And similarly Japan is in a horrible condition and the yen should weaken dramatically and it will eventually. So the dollar will turn around."

Other analysts disagree, suspecting that the new Bush administration economic team may favor a cheaper dollar, something that would help U.S. manufacturers compete against now higher priced imports. The U.S. trade deficit [the current account] has reached nearly five percent of economic output. Several analysts say a cheaper dollar may be an appropriate way to bring the U.S. trade deficit down.