February 23rd 2005
USD and oil prices move in opposite directions
As the USD has declined, the price of oil has risen. Why is this? In a nutshell, this inverse relationship exists because global oil prices are denominated in dollars. Thus, as the USD declines, oil producers are paid fewer ‘units’ of foreign currency in exchange for oil. They must compensate for this decline in real revenues by raising the price of oil (in dollars). The same relationship holds in reverse, albeit for a different reason. The United States consumes a disproportionate large amount of the global oil supply. Thus, as the price of oil rises, stock market capitalization and economic growth suffer. This can also be accompanied by a decline in the USD.
Read More: Oil Prices Up, Dollar Down – Coincidence?