Oil prices are driving the currency market. Over the past 2 days, prices have increased more than $10 a barrel. As a result, the US dollar has weakened across board, particularly against the Australian and Canadian dollars. The AUD/USD even hit a new 25 year high this morning.

For the greenback, politics is trumping economics as fears that Israel may attack oil rich Iran makes traders jittery. This fear is also reflected in gold prices which is near a 3 month high. Flight to safety is the market’s top priority with geopolitical risks on the table. Even the better than expected US trade balance numbers could not help the dollar, because the sentiment in the market is very dollar bearish.

Oil prices drove the import balance higher, but a weaker dollar helped to drive exports up 0.9 percent. This wasn’t a big surprise since the export component of the manufacturing ISM report already clued us into the possibility of a strong report.

With oil determining monetary policy, the fact that they are within a whisker of the record highs will keep most central banks hawkish. Consumer confidence will probably remain weak as $5 gasoline becomes an increasing reality for drivers around the country. However watch out for abig surprise in the dollar next week with retail sales due for release.