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US Dollar Index Is Important for Crude Oil Traders

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Nov. 20 2020, Updated 12:30 p.m. ET

US Dollar Index 

The US Dollar Index fell ~0.1% to ~94.6 on July 24, while September WTI oil futures rose 0.93% to $68.52 per barrel on the same day. The depreciating US Dollar Index supported oil prices on July 24.

Meanwhile, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose ~0.92% to $42.66 on July 24. XOP seeks to follow the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.

Pioneer Natural Resources (PXD), Continental Resources (CLR), and HighPoint Resources (HPR) rose ~3.23%, ~2.64%, and ~2.63%, respectively, on July 24. These stocks were among the top percentage gainers in XOP’s portfolio on the same day. These stocks account for ~3.8% of XOP’s holdings.

The strong dollar makes imports expensive for oil importing counties, which can pressure prices. In contrast, a weak dollar can support prices. The broadly inverse impact that the US Dollar Index has on oil prices can be seen in the above chart.

The Power Shares DB US Dollar Bullish ETF (UUP) seeks to track the US Dollar Index’s performance. UUP rose 0.04% to $25 on July 24, while the US Dollar Index fell ~0.1% on the same day.

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Impact 

On July 24, the US Dollar Index was 0.8% below its 11-month high of ~95.5 hit on June 28. A trade war could make US imports more expensive, which could increase US inflation and interest rates and support the US Dollar Index.

The Fed is expected to increase the US interest rate two more times in the second half of 2018, which could be bullish for the US Dollar Index. Expectations of a strong US Dollar Index could weigh on oil prices.

On July 24, the International Monetary Fund said that the US Dollar Index was overvalued. An improving economy outside the US could see the US Dollar Index lag compared to its peers. Other major central banks could also increase interest rates in 2018, which could help other currencies against the US Dollar Index.

Next, we’ll discuss Venezuela’s crude oil production.

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