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Keep An Eye On The Dollar – It’s More Important Than Ever

I have, on many occasions in the past in these pages, touched on the relationship between oil and the U.S. Dollar. The basics of that relationship are obvious: oil is priced in dollars on the global market, so from a logical perspective a strong dollar must put pressure on oil prices and vice versa. If the currency is worth more generally then anything priced in it is, relatively speaking, worth less…the price of that commodity goes down. This is not a tick for tick relationship, but over time and when broader trends emerge it generally holds true. That is reason enough for those who trade and invest in the energy sector to keep an eye on the dollar, but right now it may be even more important than ever.

In a world where the debt of several major economic powers is trading at negative yields (you actually have to pay to hold German and Japanese government debt, for example), the dollar offers at least some return for those looking for a safe haven for their capital. That makes it an even better “fear indicator” than usual, and movement in the dollar is therefore likely to have an exaggerated effect on oil, where global demand is more important than local conditions.

Yesterday’s somewhat exaggerated selloff in response to an inventory report that was bad, but not disastrous, shows that oil is extremely news sensitive at these levels and that those holding long positions aren’t exactly doing so with conviction. It also showed that the…

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