When oil prices go up, how does that affect the value of the U.S. dollar?

Question

Generally, as oil prices go up, does that make the U.S. dollar go up or down?

Answer 1

why is it that the oil prices go up and it affects the USD?

why can't it be that the USD goes down and oil goes up?

Answer 2

It goes down, duh

Answer 3

Well, theoretically, it is the other way round. It is the weakness in the dollar (for many other reasons such as fears of recession, relative weakness of US economy, carry trade, monetary policies, things going on in other countries that affect the exchange rates ....) that pushes the oil price up - ceteris paribus. I think the reason is quite simple. As the dollar loses value, you need more dollars to buy the same amount of anything - say a barrel of oil. Oil and other commodities are very particular because the world buys and sells them with US dollars (reserve currency).

But you are asking a very interesting question. It may be possible that the link becomes recursive, especially when investors and traders in both markets (commodity and Forex markets) start watching each other. Oil price could rise for reasons other than the weakness in USD (eg. political risk, fear of war, supply/demand, speculation ...) As oil price is pushed to new records continuously it puts the American economy under more pressure and closer to recession. So as the risk of recession increases it has a direct and indirect effect on the dollar. The direct effect is obvious: currency is the mirror of economic strength of a country, so as the country moves to recession, it shows up in its currency (devalue) - this is because investors, especially foreigners, move out of the US markets therefore selling US dollars in exchange of foreign currency and as they sell, offer of US dollars increases which sends its price (the exchange rate lower) - something to do with supply and demand. The indirect effect is that as the economy slows, the Federal Reserves sees its hands tied and cannot increase rates (increasing rates are - ceteris paribus - harming for the economy but good for fighting inflation). So when the economy cools, the market anticipates that inflation will increase (or at least not solved). Inflation is the other variable that impacts a currency. The higher the inflation rate (differential compared to other countries) the weaker the dollar gets, pushing speculators/traders on the oil market to bid up the price of oil higher, feeding a feedback effect.

Answer 4

That's very simple! You can find the answer yourself.

1. Pull up a chart of oil (futures)

2. Pull up a chart of USD (forex)

See how they correlate for each trading day =)

Answer 5

Idk, my guess is that were gas is cheaper in the world that makes our dollar fall. The dollar cannot stretch w/ inflation