Against this background, the direct correlation between the U.S. dollar exchange rate and oil prices reached the maximum in the history of observations, Bloomberg writes.
The correlation between the Bloomberg Dollar Spot Index (Bloomberg Dollar Index) and futures for Brent oil is now at the highest level since the launch of this currency indicator in 2005, notes Investing.com in this regard. In other words, the synchronicity of daily fluctuations of oil quotations and the U.S. currency has reached a peak for more than two decades.
The direct (positive) correlation of these assets is historically atypical. Most oil trades are in U.S. dollars (the so-called petrodollar system). This usually means that traders expect oil demand to decline when the US currency strengthens sharply. However, the conflict in Iran has triggered a simultaneous rise in both the dollar and oil prices.
The price of a barrel of Brent has soared about 45% since late February, when the U.S. and Israel launched the first strikes against Iran, forcing Tehran to effectively shut down shipping through the Strait of Hormuz. The IEA said this week that the market will face “severe supply shortages” through October.
Geopolitics has come to the fore
The correlation between the dollar and oil was inverse for most of the first quarter, but became direct in early March and remains so to this day.
“There are periods when macroeconomics is the main driver of market movements. But there are also intervals like this, when geopolitics, news headlines, risk appetite and market momentum take center stage,” said Brent Donnelly, president of Spectra Markets. – Right now, the narrative is that oil is going up or oil is going down.
That makes it increasingly difficult for traders to rely on other fundamental drivers of exchange rates (such as interest rate differentials or economic growth data) that investors have traditionally considered key to currency valuations.
“Barring a sharp stock market crash, moderate currency fluctuations will continue to be driven by the next oil price hikes as well as central banks’ (including the Fed) response to rising inflation,” Chris Turner, head of currency strategy at ING Bank NV, wrote this week.
