The US Dollar Index has extended its rally for an eighth consecutive week, reaching a six-month high and marking a 5.5% increase from its July lows. Analysts suggest that the prospect of rising oil prices is further bolstering the outlook for a stronger US dollar.
This week, the US Dollar Index reached its highest point in six months, with reports indicating the highest correlation between the dollar and oil prices in nine months.
Earlier, Saudi Arabian media reported that Saudi Arabia would extend its production cuts for an additional three months, exceeding market expectations for a one-month extension. Additionally, Russia has continued to respond to Saudi Arabia’s decision by committing to production cuts until the end of the year.
In response to this news, Brent crude oil broke through the $90 per barrel mark for the first time since November of the previous year, while WTI crude oil surpassed $85 per barrel.
Analysts believe that the prospect of rising oil prices, benefiting the world’s largest economy, will extend the US dollar’s longest weekly winning streak in history.
They point out that the United States exports more energy than it imports, and therefore, an increase in energy costs would favor the US dollar while potentially weakening the euro and the yen, as both economies are major energy importers.
Kenneth Broux, a strategist at French bank Société Générale, remarked:
“The surge in oil prices presents a challenge to the euro and yen. In this situation, you wouldn’t be selling the dollar.”
At a time when oil prices are surging, economic growth in the Eurozone remains lackluster. The initial Q2 GDP growth of 0.5% year-on-year fell short of expectations, and August’s harmonized CPI increased by 5.3% year-on-year, surpassing forecasts, indicating persistent inflation and causing concerns about stagflation. As a result, the euro has shown weak performance in recent times.
According to data from the International Energy Agency, the US had an energy trade surplus of 510.2 thousand tons of oil equivalent last year, while Europe had a trade deficit of 502,788 thousand tons of oil equivalent. Analysts suggest that if oil prices continue to rise, this disparity may widen further.
Timothy Graf, Head of Macro Strategy for EMEA at State Street Global Markets, commented on the impact of rising oil prices on the economy:
“Europe is already entering a danger zone, and Japan is getting close. Crude oil prices need to approach around $120 per barrel before they begin to weaken the US economy. US inflation expectations do not appear to have any danger of unanchoring.”
As the US Dollar Index continues to climb, the interplay between oil prices and currency markets will remain a critical factor to watch, impacting global financial markets and economies.
Post time: Sep-12-2023