In the past, the U.S. dollar and oil had a clear inverse correlation. This made sense as the U.S. was primarily an energy consumer. However, with the U.S. now being a net exporter, this relationship has shifted.
State Street has provided an insightful chart that demonstrates this changing dynamic. The chart displays the monthly values of the U.S. real effective exchange rate index and the oil price from 1998 to August 2019 in black, and from September 2019 to June 2023 in green.
Interestingly, as the price of oil rises, so does the value of the U.S. dollar. This trend appears to be robust.
The Interwoven Nature of Oil Policy and Foreign Objectives
To further illustrate this point, State Street presents another chart that highlights the increasing number of armed conflicts across the globe. The bank emphasizes that all major energy producers intertwine their oil policies with other foreign policy objectives. This integration has resulted in less flexibility in OPEC+'s supply compared to before 2020. When combined with the relatively inelastic supply from the United States, it creates an asymmetrical upward tilt in energy prices.
For more information, you can refer to our guide on whether gasoline prices will continue to decrease after OPEC+ oil output cuts.
Navigating the Path Ahead
Looking at the broader picture for 2024, State Street advises investors to proceed with caution due to several factors. These include sub-trend economic growth, a volatile geopolitical landscape, and concerns regarding central banks' ability to transition from monetary policies focused on curbing inflation to ones that mitigate recession risks.
As we move forward, it is crucial for investors to carefully analyze and plan their strategies considering these challenging circumstances.