How the Drop in US Dollar Affects Oil Price
The relationship between the US dollar’s value and oil have been historically consistent. They are known to move in a contrasting direction so when the value of the dollar falls, the oil price rises, and vice versa. This relationship is clearly explained by the enormous amount of US oil imports.
What events support this notion?
During the economic recession in the United States, the value of the US dollar relatively fell. However, the data from the US Energy Information Administration explained that the oil price of WTI rose to over five-folds. On the other hand, after the financial crisis in 2009, the dollar’s value showed 18 percent increase and the oil price fell.
The value of crude oil and the US dollar will always affect each other, and this can be explained simply using the supply and demand theory.
Since the US dollar is the primary currency used in buying oil, many countries will need to convert their own currencies into dollars before making a purchase. When the value of the dollar falls, many exporting countries will experience fewer sales of oil, resulting in the need to increase the live price of oil. Likewise, when the live oil price is higher, most countries reduce the quantity of oil they use, resulting in an inevitable drop in oil price in the next month. This cycle repeats itself.
How does this relationship affect the economy?
The economy of the country is under pressure when the price of oil gets higher, particularly because of the transportation cost. In which case, the value of the dollar will weaken. There’s also a great possibility that foreign investors will take advantage of the oil price increase and the depreciation of the dollar. Any country that is buying oil will shell out more dollars, thus weakening the value of the dollar even more.
Why do investors need to understand the US dollar-oil relationship?
It might be hard to completely understand the complexity of the mechanism that drives the correlation between the two assets. However, knowing it is important for investors.
Viewing the big screen, financial experts point out that even movements in the stock market can affect the value of dollar and oil price live. Investors take safe assets such as US Treasury bonds when they notice that the stock market is swaying, thus increasing the dollar’s value and lowering live oil prices. However, the US dollar-oil price relationship affects investors, too.
It’ll pay you to know this: commodities don’t move in isolation. If you want to ensure your success in the oil market trade, you must carefully study oil volatility by taking into account the movement of other factors like the US economy and the decline or rise of the dollar value.
Experts believe that the push-pull relationship between these two assets is driven by the reality that oil is one of the most accessible commodities to invest in. Good understanding of how they work together can result in making smarter investment decisions.