
Why the Oil Price and the US Dollar Are Negatively Correlated - stindle
http://beta.finimize.com/us-dollar-going-up-makes-commodities-goes-down-why/
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mikeash
The title is missing a key bit. A better title might be, "Why the oil price
_in US dollars_ and the US dollar are negatively correlated."

But then the answer to that is too obvious to bother writing about, so I guess
the article tries to obfuscate it.

Naturally, for anything where the US is not the dominant producer, its price
in dollars will correlate negatively with the value of dollars. Oil isn't
special.

~~~
stindle
The point is definitely true of all US-dollar commodities (which is basically
every commodity price out there). I wrote the article, actually, in response
to a question from a reader of our email who was confused when I wrote:
"commodities are priced in US dollars, so their price goes down as the US
dollar goes up." I had initially thought perhaps that this concept was, as you
say, more obvious than it actually appears to be for many people.

Original article & question is here: [http://beta.finimize.com/general/too-
much-oil-copper-too-lit...](http://beta.finimize.com/general/too-much-oil-
copper-too-little-demand/)

~~~
mikeash
Well, it's clearly not fair to accuse you of being deliberately obtuse when it
was prompted by a question like that!

Anyway, thanks for the context.

~~~
stindle
:) To be fair to the person, we bill ourselves as a simple email-based daily
read of the financial news (hence the Q&A function for when we're not as
simple as we'd like)

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WildUtah
The US Dollar is positively correlated with the price of things the US
exports. And negatively correlated with oil prices because the US is still a
net importer, though importing only about a third as much as it did a decade
ago.

So you will see the dollar go up when world markets are robust for American
products like software, jumbo jets, cereals, Wall Street scams, and Hollywood.

~~~
adventured
That's highly context dependent. The US Dollar soared starting in Summer 2014
due to the end of QE. It had absolutely nothing to do with US exports. The USD
returned to where it otherwise would have been without the Fed debasing it so
heavily. If the Fed raises interest rates, it'll go up further - again, while
having absolutely nothing to do with US exports in that case.

The USD and oil trade inversely because oil is priced in dollars globally. If
the value of the dollar rises, oil inherently must drop in price. It has
nothing to do with the amount of oil the US imports or not. What matters is
the currency that oil mostly trades in globally, and that is US dollars. The
dollar doesn't go down because oil goes up, that confuses the relationship
entirely. It's oil that trades in dollars, not dollars that trade in oil.

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apexkid
Didn't made sense to me. Will love if you add some comments below the blog to
explain why oil exporters are forced to lower their prices? If US dollar goes
up, then going by all capitalist laws, they should look to make more profit
because the demand is constant in each economy. Oil isn't like electricity
which is wasted if not supplied.

~~~
cuchoi
You are assuming that demand is constant, but oil can be replaced by other
sources of energy. Whith a high price of the oil there are electricity
generatora that do not profit, so they don't generate energy, leaving space
for other cheaper sources.

Also, it is arguable that other costs, such as car gas rises, some people will
use public transportation. This sustitution effect can be applied to many
other examples.

~~~
stindle
The example assumes that all other factors (like demand) remain constant. You
are correct in saying that a higher oil price will lead some users to switch
to a different energy source in some scenarios. The point is to explain why
financial commentators say (especially recently) that "the strong US dollar is
causing commodities to sell off."

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simonh
In other words when your money is worth more (compared to other currencies)
you can buy more with it.

~~~
anaolykarpov
Yeah, but the rest of the countries will afford less of what you produce, so
the demand for your products will decrease. That's why China kept its currency
artificially low for several years - to be able to sell more of its products
to the rest of the world.

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moonchrome
>Yeah, but the rest of the countries will afford less of what you produce, so
the demand for your products will decrease.

Except for financial products that generate returns USD.

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ajuc
On the other hand in countries exporting oil - currency is positively
correlated with the oil price.

I think it's because they try to maintain the earnings expressed in domestic
currency from smaller amount expressed in international currency (because oil
prices went down).

See Russia:
[http://assets.bwbx.io/images/iaPrrgKBoRbc/v1/-1x-1.jpg](http://assets.bwbx.io/images/iaPrrgKBoRbc/v1/-1x-1.jpg)

~~~
stindle
I think it's mainly because a high oil price is good for the economies of oil-
exporting countries, like Russia, Canada and Norway (to name a few). More
exports = more economic growth. More economic growth (all things equal) should
equal higher interest rates which leads to a more valuable currency.

~~~
ajuc
> More economic growth (all things equal) should equal higher interest rates
> which leads to a more valuable currency.

In fact it works the other way - if you have high interest rates - it means
people expect your currency to lose value. It's one of the less intuitive
facts about currency, and the reason I'm happy I took economy course even
though I dropped out of it on 4th year :)

The reason is - in "perfect knowledge world" it shouldn't matter if you keep
your money for a year on bank account in country X, or if you instead change
them into currency Y today, and keep it in country Y for a year (different
interest rates), and then change them back to currency X.

If these 2 scenarios produce different outcomes - it means one of the banks is
paying people more than it has to - contradiction in terms if I've ever seen
one :)

So:

    
    
       moneyInX * (1+interestRateX) = moneyInX * exchangeRateXToYToday * (1+interestRateY) / (exchangeRateXToYAfterAYear)
    
       exchangeRateXToYAfterAYear = exchangeRateXToYToday*(1+interestRateY)/(1+interestRateX)
    
    

In real world people don't predict correctly 100% of the time, but in stable
einvironment it's close (it's modified by the risk factor).

BTW that's what's happening in Russia now - high interest rates, recession,
and currency losing value.

EDIT: but you're right that it could be caused by low growth, just the low-
high interest rates mediation isn't there.

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sadlyNess
Related Read: Paper Money (1981) by 'Adam Smith' George J. W. Goodman.

------
known
Americans can PRINT dollars to buy OPEC Oil;

Rest have to EARN dollars to buy OPEC Oil;

[https://en.wikipedia.org/wiki/Petrocurrency#Currencies_used_...](https://en.wikipedia.org/wiki/Petrocurrency#Currencies_used_to_trade_oil)

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zeofig
I agree. The concept of petrodollars explains everything in the OP and more.

