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$100 Oil? Here's What To Do In The Currency Markets

Tuesday, 22 Feb 2011 | 11:42 AM ET

The turmoil in the Middle Easthas oil prices on a roll. Here's a plan for currency investors.

BetweenIranian ships cruising the Suez Canaland government tanks cruising through Libya, oil prices have been on a roll. That's nice for oil traders, but not so simple for the currency markets.

For solid ideas about how to respond, I asked Kathy Lien, director of currency research at GFT and the author of several books about currency trading.

Kathy has both short-term and long-term recommendations: “From a short term perspective, given the tensions in the Mideast and the geopolitical risk, there’s a flight to quality, to the dollar and the Swiss franc,” she said. “However, with that in mind, as oil prices continue to rise, you’ll see some central banks grow more hawkish. Central banks who have more inflation in their domestic economies will look to raise interest rates or at least talk about it, and that will be negative for the dollar because it will bring to the forefront the slow growth in the U.S.”

Kathy believes the US dollar index could rise to 80 in the next couple of weeks or month. But if other countries clamp down on inflation, or at least act like they might, she said the dollar will likely start sliding again.

For more from Kathy, check out her analysis of how the dollar has reacted to oil shocks in the past. Memo to self: step lively.

CURRENCY FUTURES

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