Over the last three days the US
dollar has been on fire. The rising strength of the Greenback is in evidence
against all its major counterparts, EURUSD, USDCAD, USDJPY, GBPUSD, AUDUSD and so on.
The rise is broad and deep. It
started well in advance of the release of the Federal Open Market Committee
(FOMC) minutes for its July 29 – 30th meeting, which were released
late last evening in GMT terms. It then seemed to pause, while market
participants parsed the comments of the members of the Committee and came up
with the view that, yes, there does seem to be a change in sentiment with
regard to the imminence of US rate rises. In fact the major discussion has now
seemingly moved to the question of how, rather than when, a regime of base rate
rises Stateside can be implemented.
Crude
Oil as a leading indicator
For some time now also, crude oil
prices have been dropping, quietly but with conviction. That this is happening in
the face of some well publicised geopolitical tensions, many of them connected
with oil producing parts of the world, is particularly significant.
In the past, the price of oil has
always been inversely correlated with the value of the Greenback on the global
stage. This is because, wherever it is bought, oil is priced in US dollars.
Therefore, when parties in non-US regions wish to purchase the black gold, they
must change their own currencies into the US unit. This creates the linkage
between the two.
It therefore becomes a question of
which is the driver of the current situation – does an increase in production,
for example as a result of the widespread use of the fracking method of
extracting shale oil and gas in the US and a consequent greater flow onto the
world market, decrease the oil price and thereby strengthen the dollar, or does
inherent dollar strength allow for a reduction in the price that must be gained
for it economically, and send this most basic of hard commodities lower?
Or have we something in the nature of
a virtuous cycle, where first one and then the other comes into play and
reinforces the move to a more normal, in historical terms, oil price and US
dollar value?
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