Crude oil and the US Dollar Index
In the last six trading sessions, US crude oil (USO) gained about 8.2%. However, the US Dollar Index (UUP) only rose 0.27%. Crude oil rallied with a flat US Dollar Index. This shows how crude oil’s movement in the current scenario was fueled more by mainstream news compared to the US Dollar Index.
Rising oil could push the dollar up
The iShares TIPS Bond (TIP) tracks inflation-related sentiments in the US markets. It’s closely related to crude oil. The above graph shows the movement of the ETF and crude oil in the last ten years. After February 11, 2016, when crude oil recovered from its multiyear and 2016 lows, the ETF’s price also started to rally. A rise in oil prices—which can positively impact inflation—can push the ETF up. The inflation rate is one of the important economic data points that impact interest rate decisions. So, the Market’s expectation of a rate hike could strengthen the US Dollar Index if the crude oil rally continues. Rising crude oil can also reflect improving consumer sentiment and expectations of economic growth. These factors can lead to higher interest rates.
Oil-weighted stocks and ETFs
The above analysis is important for oil-weighted stocks such as Abraxas Petroleum (AXAS), Triangle Petroleum (TPLM), and Denbury Resources (DNR). The Direxion Daily Energy Bear 3X ETF (ERY), the First Trust Energy AlphaDEX ETF (FXN), the United States Brent Oil Fund (BNO), and the United States Oil Fund (USO)(OIIL) are also impacted by the correlation of crude oil with the US Dollar Index.