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US Dollar Is Flying High after Trump Win: Will Oil Prices Fall?

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Crude oil and the US Dollar Index

US crude oil (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) futures contracts for January delivery rose ~3.5% between November 15, 2016, and November 22, 2016. The US dollar (UUP) (USDU) rose ~0.80% during that period.

In the past five trading sessions, crude oil and the US Dollar Index moved in opposite directions in four of five instances. The correlation between crude oil and the US dollar in the past five trading sessions was about -60.0%. It showed the inverse relationship between the US dollar and oil prices.

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A weaker dollar makes crude oil cheaper for oil-importing countries, which boosts prices. When the dollar strengthens, it can pressure crude oil prices. President-elect Donald Trump’s inflationary policies, combined with an already hawkish Fed, point to higher interest rates in the future. That has helped push the dollar higher.

Long-term correlation between crude oil and the US Dollar Index

Between September 2007 and April 2013, the one-month correlation between crude oil and the US Dollar Index was positive only in a few instances. The correlation coefficients were largely negative during that period. The negative correlation implied that crude oil had an inverse relationship with the US Dollar Index.

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Effect of special events on the dollar-oil correlation

From April 2013 to date, crude oil and the US Dollar Index’s one-month correlations have been more bidirectional. In the past three and a half years, the one-month correlations fluctuated between -64.0% and 43.0%.

The correlations indicate that the following fundamental drivers sometimes had greater impacts on crude oil than the US dollar:

  • Saudi Arabia’s decision not to cut production
  • US shale oil producers’ cost and production dynamics
  • OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC production data
  • US inventory data
  • rig count data
  • other news regarding fundamentals

Trump’s energy policy could also mean a lot more crude oil, natural gas, and coal produced in the United States. This could have a negative effect on crude oil prices as well as a negative effect of the stronger dollar on prices.

ETFs and crude oil

ETFs such as 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 Exploration & Production Bear 3x ETF (DRIP), and the United States Oil ETF (USO) are also impacted by movements in crude oil.

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