A Duel to the Debt Concerns...
Yesterday’s issue of The Schork Reportstated that “Pundits are now beginning to raise the specter of ‘decoupling,’ where a higher dollar moves in line with commodity prices. We’re not falling for it.”
Yesterday, the dollar rose 1.00% while WTI fell by 0.39%. In afterhours electronic trading WTI fared even worse, at one point dropping down below the 85.50 mark.
There are two main reasons why the dollar and crude oil move in opposite directions:
Firstly, crude is a dollar denominated commodity. By the laws of economics 101, a weaker dollar makes crude oil cheaper for refiners buying in foreign currencies. As the price drops, these refiners can buy more barrels of crude oil, pushing up demand. Higher demand leads to higher prices and the value of crude rises in dollar terms. Conversely, a stronger dollar means crude oil is now more expensive. This reduces demand from refiners, and a lack of buyers leads to lower prices.
Secondly, the commodities complex functions as a lifeboat when traders are concerned about future strength in the dollar. Investors are likely to pull their money out of T-bills and in to (for instance) the USO, which then purchases crude oil futures.