High oil prices to keep U.S. dollar on ropes

By Steven C. Johnson - Analysis

NEW YORK (Reuters) - The longer oil prices remain above $100, the worse things are likely to get for the U.S. dollar.

With the greenback hitting all-time lows and no end to its slide in sight, oil exporters are likely to shift a larger share of their revenues into other currencies.

That weakens the dollar further, making dollar-denominated oil more costly for American consumers. Inflation fears also prompt investors to buy commodities as a hedge and favor strong currencies over the weak dollar.

It's what Morgan Stanley global currency strategist Stephen Jen called a "vicious circle" that can be very hard to break.

"A lot of the premium in commodity prices now is directly correlated to dollar weakness, and you need to see a dollar turnaround for oil prices to pull back and U.S. growth to start to pick up again," said Greg Salvaggio, an FX trader at Tempus Consulting in Washington.

If that doesn't happen, some worry that investors could stop buying U.S. Treasury debt, causing interest rates to spike, inflation to worsen and living standards to slide.

That's troubling news, particularly now that economists believe the United States has already entered a recession that may prove more persistent and painful than any since the 1930s.

At current prices, Jen said oil exporters stand to earn $2.1 trillion in annual revenues, with some 90 percent of it likely to be poured into global capital markets.