Oil Slump Helps Dollar Over the Short Term

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Pile of US Dollars
Pile of Dollars
Pile of US Dollars
Pile of Dollars

Oil’s woes paves the way for smooth sailing for the US Dollar over the short term

 

It is too easy to say that the big winner in global oil prices current decline are global consumers. After all, most countries consumer more petroleum products than they produce. This is a bit amorphous. Sure, eventually, consumer purchasing power will be bolstered by continuing reduction in prices at the pump but there are also other factors at work which might dampen oil’s ultimate impact. Interest rates, general consumer sentiment, global manufacturing and trade trends, and other factors might downplay the positive impact lower oil prices have on consumer sentiment. Still, it’s a safe bet to say that there will be a net positive impact on consumer sentiment and spending patterns. This is most welcome news.

The biggest winner amidst oil’s slump? The US dollar

 

No matter how you cut it, the biggest winner in oil’s dramatic nearly 50% slide is the US dollar. The price of commodities like oil and the US dollar historically work in opposite directions. With rare exception (the most recent being the Great Recession of 2008), when oil goes down, the dollar goes up, and vice versa. This is precisely what’s happening now. Usually, the Japanese Yen is quite stable and is viewed as a safe haven by investors during turbulent times. As oil’s downward trend fuels investor optimism regarding an upward turn in global consumer sentiment, more and more investors are betting on the dollar. The US dollar has shown quite a healthy rate of appreciation in the past quarter. Expect this trend to continue into the near term.

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