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Currency reversals underpin oil market strength (USO, BNO)

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The USD fell to its lowest level against the euro in nearly two months this morning, giving lingering support from Friday's U.S. jobless numbers an added boost and pushing NYMEX crude back to the upside in early trade.

Today's oil-friendly sentiment is in large part due to U.S. Federal Reserve Bank Chairman Ben Bernanke admitting during the course of his testimony yesterday to the Senate Budget Committee that although the country has been gradually recovering over the past 2-1/2 years, the pace of recovery has been "frustratingly slow."

The euro gained strength of its own in light of reports this morning that the European Central Bank is now set to give up some ground over its bond holdings in Greece.

This has proven to be a major sticking point in negotiations, but it now appears that the central bank will undertake an exchange with the EFSF -- giving up its Greek debt for EFSF bonds -- and will not make any profit on its holdings. Greece will then repay the EFSF at the ECB's original purchase price.

This in turn should make agreement with private Greek bond holders a less onerous task, as these creditors have long argued that they should not be coerced into taking substantial haircuts on their debt portfolios while the ECB makes no such compromises.

A further political boost for the euro came from French President Nicolas Sarkozy, who said yesterday that allowing Greece to go bankrupt "isn't an option."

Germany's President Angela Markel stated: "I will have no part in forcing Greece out of the euro."

One note of caution, though, is that without such do-or-die sanctions or a formal enforceable system of fiscal transfers, such debt restructuring will remain a highly tenuous process -- not only for Greece, but Portugal, Spain and any other euro member needing help.

In the meantime, a stronger euro and a weaker dollar are naturally giving oil markets a lift. Oil, like many other commodities, is traded around the world in dollar terms, so as the U.S. currency's buying power erodes, every barrel of oil naturally reprices at a higher level to compensate.

by Simon Watkins for Emerging Money

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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