Currency exchange rates and the price of gasoline

http://finance.yahoo.com/charts#chart1:symbol=usdeur=x;range=5y;charttype=line;crosshair=on;logscale=on;source=undefined

http://tinyurl.com/254ylt

This is a link to a 5-year chart showing the exchange rate for the U.S. Dollar versus the Euro. At the end of 2002, the dollar and Euro traded at about 1 for 1 ($1 was worth 1 Euro). Today, one dollar will buy you about 75 cents in Euros.

If you are a Saudi sheik, and you can sell a barrel of oil for 50 Euros today, and you sold it for 50 Euros in 2002, you're going to expect 50 Euros worth of dollars. In 2002, that would cost an American buyer $50. Today, it would cost $69 American greenbacks. In other words, how on earth could we NOT be paying more to import oil when our dollar is worth so much less on the world market?

Why is the dollar worth less? Because there are so many of them floating around the world, because we import so much stuff - oil from the Middle East, Venezuela, Canada; loan funding from all over the world; almost everything from China; truffles from France. We don't export enough of our own American-made products to allow our trading partners to send those dollars home to us. Our biggest export is debt. If our dollar continues to decline in value, international lenders/investors will eventually demand a higher interest rate on our debt to make up for the "equity erosion" resulting from a declining dollar.

So Ben Bernanke, our esteemed Fed chief, is faced with an ugly choice. Option1: lower interest rates, and the value of the dollar declines even more. The interest on the Federal defecit will end up costing American taxpayers more if our international lenders demand higher rates. Imports cost us more, including oil, while exports cost our trading partners less, so we sell slightly more domestic goods. Option 2: Hold interest rates steady, and our investment markets suffer the consequences of their recent actions. Which probably means a recession, and some banks and mortgage companies - and their investors - going under or taking large losses. Option 3, which no one wants to discuss: Raise rates.