uploads///Why Crude Oil Could Be Responsible For Strengthening Dollar Index

The Oil Rally: Is It a Leading Indicator for a Stronger Dollar?

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May. 25 2016, Published 11:23 a.m. ET

Crude oil and the US Dollar Index

In the last six trading sessions, US crude oil (USO) (OIIL) rose about 0.64%. However, the US Dollar Index (UUP) rose 1.1%. In the last five trading sessions ended on May 24, 2016, the dollar index and crude oil moved in opposite directions based on closing price.

This shows how crude oil’s movement in the current scenario was fueled by the dollar index. A stronger dollar makes crude oil purchases more expensive for oil-importing countries and usually means weaker crude oil. The opposite also holds true.

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How can rising oil push up the dollar?

The iShares TIPS Bond (TIP) tracks inflation-related sentiments in US markets. It’s closely related to crude oil. The above graph shows the movement of TIP and crude oil in the last ten years. After February 11, 2016, when crude oil recovered from its multiyear and 2016 lows, TIP’s price started to rally. A rise in oil prices, which can positively impact inflation, could push up TIP.

The inflation rate is an important economic data point that impacts interest rate decisions. Market expectations 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 ETF (BNO), and the United States Oil ETF (USO) are also impacted by the correlation of crude oil with the US Dollar Index.

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