Purely from an academic point, why does rising oil price weaken the greenback though oil is paid in USD ?

Question

1) because of imported inflation, as US is import reliant and rising oil prices leads to imported inflation, since imports are now more expensive.

2) Also, since oil from OPEC is paid for in USD, what is the impact of rising oil prices on USD? lesser demand for oil leading to lesser demand for USD?

am i correct on both points, or is my reasoning flawed?

Answer 1

Inflation affects a country's currency at a less quick rate than fluctuations in M1 or M2. However, it is a more steady state of attrition or addition as the case may be.

Oil, in the form of petrodollars sets the standard for today's pricing, in both banking and consumerism.  

Lets look at Eurodollars as today's example. Countries rich in petrodollars rather than buy U.S. Treasuries, buy Eurodollars. That gives them significant holdings in the European Central Bank. Thus, Oil's rise keys the Euro rise against the USD.

In recent months, Gold had been tied into Oil's rise, hinting that petrodollars were going into bullion. That strengthened the CHF vs. the USD.

Apparently is goes both ways. A weaker Canadian economy in the past month has seen the Loonie lose vs. the USD solely on Inflation figures, despite Oil's records.

Answer 2

Well think of it this way. Inflation is defined as an overall rise in prices. However, when a particular commodity (oil for instance) rises, it can have a huge impact upon the financial markets.

In other words, it's a sign of inflationary pressure! And inflation decreases the purchasing power of the dollar. Translation, as oil prices rise, inflationary fears increase too, which leads to a falling dolar due to the decrease or a perceived decrease in purchasing power.

Answer 3

The dollar has lost value ,60% . When you have some thing of little value it takes more to buy anything .