Does the US Dollar Index Impact Crude Oil Prices?

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Jul. 6 2016, Published 8:19 a.m. ET

Crude oil and the US Dollar Index

Crude oil (USO) fell 2.6% between June 28 and July 5, 2016. The US Dollar Index (UUP) fell about 0.08%. Initially, the index fell after the Fed kept interest rates unchanged on June 15, 2016. From a low of 93.6 on June 8, the US Dollar Index started to recover due to the hope of a possible rate hike on June 15. On June 8, crude oil touched its 2016 high of $51.23. However, the US Dollar Index strengthened following the surprise Brexit vote. The United Kingdom leaving the European Union fueled bearishness in global markets.

The correlation between crude oil and the US Dollar Index in the last four trading sessions was approximately -94.9%. This shows the strong inverse relationship between the two assets over the last few days.

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Correlation of crude oil and the US Dollar Index since 2007

Between September 2007 and April 2013, crude oil and the US Dollar Index’s one-month correlations were positive in only a few instances. Their correlation coefficients were largely negative during this period.

Crude oil’s negative correlation with the US Dollar Index between September 2007 and April 2013 clearly implies that crude oil had an inverse relationship with the US Dollar Index.

However, from April 2013 to date, crude oil and the US Dollar Index’s one-month correlations have been more bidirectional. In the last three years, these one-month correlations have fluctuated between -64% and 43%. This could indicate that the following fundamental drivers sometimes had greater impacts on crude oil than on the dollar.

  • Saudi Arabia’s decision not to cut production
  • US shale oil producers’ cost and production dynamics
  • US inventory data
  • other fundamental news

Oil-weighted stocks and ETFs

The above analysis is important for oil-weighted stocks such as Abraxas Petroleum (AXAS), Halcon Resources (HK), Triangle Petroleum (TPLM), RSP Permian (RSPP), Northern Oil and Gas (NOG), Oasis Petroleum (OAS), 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), the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and Bear 3x Shares (DRIP), and the United States Oil ETF (USO) are also impacted by crude oil.

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