Forex Blog: Currency Trading News & Analysis.

August 27th 2008

An End to the Oil-Dollar Spiral?

Over the last few years, the inverse relationship between the price of oil and the value of the US Dollar has been remarkable. As the Dollar has fallen to record lows, oil has risen to record highs. Now, with a massive Dollar rally underway, the price of oil has virtually collapsed. This relationship is understandable, since expensive oil contributes to the US trade deficit and crimps the economy, while the weaker Dollar, in turn, drives oil-producing countries to charge more in Dollar terms for their oil so that the price remains constant in absolute terms.

However, there are signs that this link may be coming to an end. Hedge funds, which are famous for spotting such trends and riding them to profitability, are winding down their long/short positions in currency and commodity prices because such strategies have evidently become unprofitable. Apparently, analysts and traders expect other fundamental factors to assume control over the price of oil and the Dollar. Namely, the still-unfolding credit crisis and the projected long-term supply/demand imbalance in energy markets will become more relevant. In short, don’t expect a further drop in the price of oil to necessarily help the Dollar, and vice versa.

Read More: Dollar-Oil Relationship In Doubt As Market Drivers Diverge

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Posted by Adam Kritzer | in Investing & Trading, US Dollar | No Comments »

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