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Dollar Strength Is Likely To Cap Oil Price Gains

Tanker

This morning, my old stomping ground of forex is making a rare appearance in the news. The problems in Turkey and the actions of the Erdogan regime caused the dollar index to spike overnight, which in turn drew attention to dollar strength that has been building for some time. Very few have been talking about it to this point, but the fact that the U.S. currency is at levels not seen for over a year is now becoming a subject of interest. That is probably overdue, but does it really mean anything for energy investors, or more specifically for the price of oil?

“The strength of the dollar influences the price of oil” is a sentence that to my mind should be an obvious statement of fact, yet a lot of people doubt it these days. The doubters, however get it wrong on two fronts.

First, they tend to misinterpret the statement above. I do not maintain that dollar strength is the only influence on the price of oil, nor even that it is the biggest, simply that it is one. Pointing to the lack of inverse correlation between the charts below, as those doubters often do, is therefore irrelevant. At different times, different things become the major influence on oil. It could be growth projections and their potential effect on demand, or OPEC squabbles and their potential effect on supply, for example. In reality of course, all those factors, and a whole host of others, are always simultaneously affecting price. When I say that “The strength of the dollar influences…

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