The dollar slumped to a 28-year low against the Australian currency and a more than nine-month trough versus the euro a day after the Fed decision to buy $600 billion in U.S. Treasury bonds, as investors sought better returns elsewhere.
A weak dollar lifts oil and other dollar-denominated commodities as it lowers the value of the currency paid to oil producers and it attracts investments seeking higher gains than those found in other markets.
The dollar fell further as data showed first-time filings by Americans for jobless benefits rose more than expected last week, reflecting a weak labor market.
“The Fed stimulus will continue to draw investors/traders to oil as well as most other raw materials in response to the weak dollar and fears of inflation starting to materialize down the road,” said Dominick Chirichella, senior partner at Energy Management Institute in New York
U.S. crude for December delivery shot up to an early high of $86.68 a barrel, the highest since May 3. By 12:10 p.m. EDT (1610 GMT), it traded up $1.65, or 2 percent, to $86.34.
ICE December Brent rose $1.55, or 1.8 percent, to $87.93.
U.S. front-month crude oil has gained 12.7 percent since August 27, when Federal Reserve Chairman Ben Bernanke signaled that plans were afoot for another round of quantitative easing. Correlating inversely, the U.S. dollar’s value against a basket of currencies has fallen 6.5 percent in that period.
Technical indicators point to a bullish target of $87.04, with support at $84, according to Reuters analyst Wang Tao.
HIGHER PRICE RANGE
Wide anticipation of the Fed’s fresh stimulus in October drove oil prices out of the previous $70-$80 a barrel range.
Top oil exporter Saudi Arabia earlier this week shifted its price range up to $70-$90 but on Thursday, a senior Gulf source said prices between $70-$80 is still a fair price.
Oil at $90 would not hold back growth in the world economy, OPEC Secretary General Abdullah al-Badri said. The comments added to indications this week that the Organization of the Petroleum Exporting Countries was unlikely to step in to quell rising prices.
“It’s the dollar, a function of QE2, and some post-election euphoria and the OPEC green light to $90,” said Robert Yawger, senior vice president, energy futures at MF Global in New York.
Many analysts said fluctuations in the dollar will remain the principal driver in the oil market, although some have warned of long-term dangers of QE2 for Asian demand growth.
“We have trouble seeing how much longer the current run can extend to, given that at some point, higher commodity prices will lead to even higher inflation and interest rates in emerging countries,” said Edward Meir, analyst at MF Global, adding that the dollar was currently the “sole driver.”
Oil prices remain supported by Wednesday’s U.S. government data showing larger-than-expected drawdowns last week in distillate and gasoline stocks, even though crude inventories rose more than forecast.