Tuesday, January 27, 2015

Oil's link to the dollar

(Bloomberg) -- Oil may be unable to conclude a six-month plunge as long as the dollar’s value keeps climbing, according to Burt White, LPL Financial Corp.’s chief investment officer.

As the chart shows, crude oil and the U.S. currency tend to move in opposite directions. The chart tracks the price of crude for immediate delivery in Cushing, Oklahoma, as compiled by Bloomberg, and a trade-weighted dollar index produced by the Federal Reserve. Oil is priced in dollars.

The correlation between oil and the dollar during the past 52 weeks was minus 0.99, about as negative as it could possibly be, according to data compiled by Bloomberg. Correlation can be between 1 and minus 1, with the latter showing one data series typically rises when the other falls, and vice versa.

“U.S. dollar strength may prolong the bottoming process for oil,” White wrote yesterday in a note. The spot price at Cushing dropped as much as 15 percent this year, bringing its tumble from a July 23 high to 58 percent.

The trade-weighted dollar index, by contrast, ended last week at its highest level since March 2009. The indicator is based on the dollar’s value against the euro, the yen and 24 other currencies.

Lower prices for oil and other commodities as the dollar rises may restrain inflation and affect Federal Reserve policy as well, wrote White, who is based in Boston. The central bank has left its key interest rate near zero since December 2008. 

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