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Oil prices rose to their highest level this year Friday on renewed optimism that the global downturn since World War II is abating and the growing belief that the U.S. dollar is set to drop.
Light, sweet crude for October delivery rose as much as $1.57, or 2.15%, to $74.48 a barrel on the New York Mercantile Exchange (NYMEX) – its highest level this year. The jump followed earlier reports that with Europe's economy showing signs of strength, the European Central Bank (ECB) will consider raising its benchmark lending rate as soon as June 2010.
The economies of both Germany and France unexpectedly grew 0.3% in the second quarter after four quarters of recession, Eurostat figures showed last week. The Eurozone economy as a whole moved closer to recovery in the second quarter, as well, as the gross domestic product (GDP) of the 16-nation bloc fell just 0.1% compared to a 2.5% contraction in the three months prior.
Markit's Composite Purchasing Managers Index (PMI) for the Eurozone – which combines activity in both the services and manufacturing sectors – jumped three points to 50.0 in August, the precise point that divides contraction and growth, providing further evidence that the region's economy is emerging from recession faster than expected.
"The surveys add to recent data suggesting that the recession is over and, indeed, the economy most likely grew in Q3," Nick Kounis at Fortis told Reuters.
With the Eurozone economy seemingly on the mend the ECB is once again turning attention towards inflation. Consumer prices in the Eurozone fell at a record annual rate of 0.7% in July, but that's partly because inflation was so high last year. Inflation accelerated at a record high rate of 4% in June and July 2008.
The Eurozone Future Inflation Gauge for the second time this year rose to 85.1 in June from 84.5 in May. If a recovery gets underway by mid-2010 as many economists now expect, it could spike higher, leading the ECB to take action.
The central bank will lift its key interest rate, which is currently at a record low 1%, to 2.5% by the end of next year Holger Schmieding, chief European economist at Bank of America-Merrill Lynch (NYSE: BAC) told Bloomberg.
Another analyst, Elga Bartsch, chief European economist at Morgan Stanley (NYSE: MS) told Bloomberg that the rate would be raised to 1.75% by the end of 2010.
By contrast, U.S. Federal Reserve Chairman Ben S. Bernanke earlier this month said the benchmark Federal Funds rate would remain "exceptionally low" for "an extended period" of time. The rate currently stands at a record-low range of 0-0.25%. That's bad news for the dollar and good news for commodities.
The dollar dropped as much as 0.8% against the euro Friday, leading oil to its highest level since last October.
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