Oil is up, and this time the dollar is down

Oil is up and the dollar is down. If the petroleum part of that relationship doesn’t change significantly – which looks unlikely – the currency piece probably won’t, either.

For three decades, the correlation between two of the world’s most important prices was strongly positive, with oil and the dollar rising and falling in tandem.
But since early 2002, the correlation between oil and the dollar has been negative. When oil rises, the U.S. currency falls.

What happened? Oil nations are more willing to diversify out of the dollar than they used to be, said Mansoor Mohi-uddin, the head of foreign exchange strategy at UBS, in Zurich.

Stephen Jen, the global head of current research for Morgan Stanley in London, agreed. “Oil exporters’ propensity to import from the U.S. has declined in recent years, while their tendency to import from Europe and Asia has risen steadily,” he said, adding that OPEC nations currently buy more than three times as much from the European Union as from the United States.

To the extent that oil exporters keep buying European, Europe’s economy may be less affected by higher oil prices than the U.S. economy, prompting investors to favor European investments. And since oil imports account for about a third of the U.S. trade deficit, “high and rising oil prices may be particularly bad for the dollar,” Jen said.

Since the start of 1993, the dollar has been the worst performer among the world’s 10 major currencies during periods when increases of oil prices were stronger than usual, Robinson said. Last week, commodity analysts at Goldman Sachs raised their year-end oil-price forecast to $85 a barrel, compared with their previous forecast of $72.

That doesn’t look like good news for the dollar.

International Herald Tribune