Everyone knows that the price of gasoline has been surging higher at the pump. The average price of a gallon of gasoline in the United States is now $3.86. In many other parts of the country such as California, Hawaii, New York, Illinois, Washington, Michigan, Maine, Oregon, and Connecticut the price is over $4.00 a gallon for regular unleaded. As many of you all know, gasoline is a direct tax on the U.S. consumer. Consumer spending in the United States accounts for roughly 70.0 percent of the gross domestic product in the United States.
High gasoline prices will certainly restrict consumer spending at many leading retailers. The high price of gasoline will usually hurt the lower income families first. This is very evident if you look at stocks such as Family Dollar Stores Inc (NYSE:FDO), Dollar Tree Inc (NASDAQ:DLTR), and Dollar General Corp (NYSE:DG). All of these leading stocks that cater to the lower income consumer have been selling off lately. Remember, higher gasoline prices are a direct tax on everyone in the country. Consumers need gasoline as much as we need food these days to survive.
Traders can easily look at a chart of the United States Gasoline Fund (NYSEARCA:UGA) to see the dramatic rise since June 21, 2012 when the UGA traded as low as $43.13 a share. Today, the UGA is trading at $61.88 a share which is a new three year high. The all time high for the UGA was $65.33 a share made in 2008. This old high is now in the sites of many traders speculating in the gasoline market.
What is the cause of the high gasoline price? The first cause of high gasoline is the recent weakness in the U.S. Dollar Index futures (DX-U2). The U.S. Dollar Index has tumbled lower by more than 5.0 percent since July 24, 2012. This is a dramatic decline for the U.S. Dollar Index which is the world’s reserve currency. You see, if you want to buy a barrel of oil in Japan, or some other country you must buy that barrel of oil in U.S. Dollars. The Japanese cannot buy oil in Japanese Yen or some other currency, it must be U.S. Dollars. This is why the price of gasoline will inflate when the U.S. Dollar declines. Traders that do not have a chart of the U.S. Dollar Index can easily follow a chart of the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP).
Tomorrow, the Federal Reserve Bank (central bank of the U.S.) is going to announce its interest rate policy decision. Many traders and investors are also waiting to hear the central bank’s next stimulus program called QE-3. When more stimulus is put into the system it weakens and dilutes the strength of the U.S. Dollar. This act will simply push gasoline and other commodity prices higher. If there is bad weather, or a conflict in an oil producing country that will create higher energy costs for all consumers. Here is the bright side, while gasoline prices continue to surge so do stock prices, however, let’s see how everyone feels when gasoline is over $5.00 a gallon very soon.