Why the Oil Price and the US Dollar Are Negatively Correlated | Hacker News Reader

Why the Oil Price and the US Dollar Are Negatively Correlated

beta.finimize.com

44 pointsstindle24 comments

The title is missing a key bit. A better title might be, "Why the oil price in US dollars and the US dollar are negatively correlated."

But then the answer to that is too obvious to bother writing about, so I guess the article tries to obfuscate it.

Naturally, for anything where the US is not the dominant producer, its price in dollars will correlate negatively with the value of dollars. Oil isn't special.

The point is definitely true of all US-dollar commodities (which is basically every commodity price out there). I wrote the article, actually, in response to a question from a reader of our email who was confused when I wrote: "commodities are priced in US dollars, so their price goes down as the US dollar goes up." I had initially thought perhaps that this concept was, as you say, more obvious than it actually appears to be for many people.

Original article & question is here: http://beta.finimize.com/general/too-much-oil-copper-too-lit...

Well, it's clearly not fair to accuse you of being deliberately obtuse when it was prompted by a question like that!

Anyway, thanks for the context.

:) To be fair to the person, we bill ourselves as a simple email-based daily read of the financial news (hence the Q&A function for when we're not as simple as we'd like)

The US Dollar is positively correlated with the price of things the US exports. And negatively correlated with oil prices because the US is still a net importer, though importing only about a third as much as it did a decade ago.

So you will see the dollar go up when world markets are robust for American products like software, jumbo jets, cereals, Wall Street scams, and Hollywood.

That's highly context dependent. The US Dollar soared starting in Summer 2014 due to the end of QE. It had absolutely nothing to do with US exports. The USD returned to where it otherwise would have been without the Fed debasing it so heavily. If the Fed raises interest rates, it'll go up further - again, while having absolutely nothing to do with US exports in that case.

The USD and oil trade inversely because oil is priced in dollars globally. If the value of the dollar rises, oil inherently must drop in price. It has nothing to do with the amount of oil the US imports or not. What matters is the currency that oil mostly trades in globally, and that is US dollars. The dollar doesn't go down because oil goes up, that confuses the relationship entirely. It's oil that trades in dollars, not dollars that trade in oil.

Didn't made sense to me. Will love if you add some comments below the blog to explain why oil exporters are forced to lower their prices? If US dollar goes up, then going by all capitalist laws, they should look to make more profit because the demand is constant in each economy. Oil isn't like electricity which is wasted if not supplied.

You are assuming that demand is constant, but oil can be replaced by other sources of energy. Whith a high price of the oil there are electricity generatora that do not profit, so they don't generate energy, leaving space for other cheaper sources.

Also, it is arguable that other costs, such as car gas rises, some people will use public transportation. This sustitution effect can be applied to many other examples.

The example assumes that all other factors (like demand) remain constant. You are correct in saying that a higher oil price will lead some users to switch to a different energy source in some scenarios. The point is to explain why financial commentators say (especially recently) that "the strong US dollar is causing commodities to sell off."

In real terms they haven't lowered their prices. If they had charged the same in dollars, after the dollar had appreciated, they would have in effect been charging their customers more as the dollar is now worth more. By lowering the dollar price, they keep their actual price the same as the dollar is now worth more.

> Oil isn't like electricity which is wasted if not supplied.

To a first approximation, yes, it is.

Oil is very expensive to store, and the flow of most wheels can't change on short notice. Over a long time, production does change following price fluctuations, but in short times, it does not.

Correct. And the USA has a multi billion $$ storage project for oil t

https://en.wikipedia.org/wiki/Strategic_Petroleum_Reserve_(U...

That's specifically for defense purposes. A lot of crude is sitting in oil tankers off the coast of Houston waiting for oil prices to increase before delivering.

In other words when your money is worth more (compared to other currencies) you can buy more with it.

Yeah, but the rest of the countries will afford less of what you produce, so the demand for your products will decrease. That's why China kept its currency artificially low for several years - to be able to sell more of its products to the rest of the world.

>Yeah, but the rest of the countries will afford less of what you produce, so the demand for your products will decrease.

Except for financial products that generate returns USD.

You're almost right. Take out the phrasing "compared to other currencies" and you're there. When dollars are worth more, the dollar-denominated price of everything is lower.

>Take out the phrasing "compared to other currencies" and you're there

In that situation - the dollar has a stable price versus other currencies but goods are cheaper - I don't think it makes as much sense to say that the dollar is more valuable because all currencies are more valuable in the same degree. Rather it's the goods that have got objectively cheaper.

On the other hand in countries exporting oil - currency is positively correlated with the oil price.

I think it's because they try to maintain the earnings expressed in domestic currency from smaller amount expressed in international currency (because oil prices went down).

See Russia: http://assets.bwbx.io/images/iaPrrgKBoRbc/v1/-1x-1.jpg

I think it's mainly because a high oil price is good for the economies of oil-exporting countries, like Russia, Canada and Norway (to name a few). More exports = more economic growth. More economic growth (all things equal) should equal higher interest rates which leads to a more valuable currency.

> More economic growth (all things equal) should equal higher interest rates which leads to a more valuable currency.

In fact it works the other way - if you have high interest rates - it means people expect your currency to lose value. It's one of the less intuitive facts about currency, and the reason I'm happy I took economy course even though I dropped out of it on 4th year :)

The reason is - in "perfect knowledge world" it shouldn't matter if you keep your money for a year on bank account in country X, or if you instead change them into currency Y today, and keep it in country Y for a year (different interest rates), and then change them back to currency X.

If these 2 scenarios produce different outcomes - it means one of the banks is paying people more than it has to - contradiction in terms if I've ever seen one :)

So:

   moneyInX * (1+interestRateX) = moneyInX * exchangeRateXToYToday * (1+interestRateY) / (exchangeRateXToYAfterAYear)

   exchangeRateXToYAfterAYear = exchangeRateXToYToday*(1+interestRateY)/(1+interestRateX)

In real world people don't predict correctly 100% of the time, but in stable einvironment it's close (it's modified by the risk factor).

BTW that's what's happening in Russia now - high interest rates, recession, and currency losing value.

EDIT: but you're right that it could be caused by low growth, just the low-high interest rates mediation isn't there.

Related Read: Paper Money (1981) by 'Adam Smith' George J. W. Goodman.

Americans can PRINT dollars to buy OPEC Oil;

Rest have to EARN dollars to buy OPEC Oil;

https://en.wikipedia.org/wiki/Petrocurrency#Currencies_used_...

I agree. The concept of petrodollars explains everything in the OP and more.

Reply on news.ycombinator.com