Oil-USD linkages
A look more closely at the real ties between oil and the dollar suggest that the dollar’s influence on oil is both relatively new and relatively limited. Rather, external factors – including doubts about the US economy, falling US interest rates and investor hopes for the global-growth outlook – are driving both the dollar and oil.
Myths and realities of the oil-USD relationship Recent years have seen a growing correlation between the US dollar and oil prices. Looking at monthly percentage changes in the trade-weighted USD (USD TWI) and WTI crude, the correlation has intensified.
While markets and market drivers can change, it is noteworthy that this relationship has historically not been consistent, even just isolating periods of USD weakness. In the early 1970s, the monthy level correlation between the trade-weighted USD and an OPEC weighted crude oil price was -0.68; however, in the late 1980s when the dollar fell again, by an even greater degree, the correlation flipped to a positive 0.72.
How do investors square the oil-USD circle today? Some arguments frankly make more sense than others.
OPEC’s objectives. The OPEC focus extends beyond production adjustments to oil-exporter rhetoric. Iran has now arranged for 85% of its oil income to be paid in non-dollar currencies. Venezuela, meanwhile, has repeatedly told the press that OPEC is looking at the possibility of creating a currency basket, instead of just dollars, to price oil in the future.
True, oil is a hard asset with limited supply, which should set a floor under price and make it attractive especially during periods of heightened financial-market uncertainty where paper assets are less attractive. However, oil is still influenced by cyclical considerations. Investors looking for safe havens probably would prefer gold over oil given relatively looser cyclical ties. Not totally surprisingly given the
current market uncertainties, gold prices have soared and have also correlated negatively with the dollar.
Hopes for global growth are clearly critical for commodity prices including oil. Decent global growth suggests decent commodity demand, and hence higher prices.
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forex usd correlation to oil futures
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