Why USD
For decades, “black gold” has played a huge role in the development of the world economy. The oil price and the level of its production have a direct impact on the foreign exchange markets.
The United States plays a central role in the global oil market for several reasons:
- The USA is a large world oil producer.
- The United States remains the world's most voracious consumer of “black gold”.
- Despite significant personal reserves, the United States continues to buy oil, providing exports to other countries.
This is why you may have heard how the oil price “crushes” or “supports” the US dollar.
Changes in USD Rates
Oil prices and the US dollar have an indirect correlation:
- Since the United States is the largest consumer of oil in the world, the rise in prices for each barrel leads to an increase in the price of many manufactured goods. This negatively affects the dollar exchange rate.
- The cheaper the “black gold”, the lower the cost of goods produced. Therefore, the decline in oil prices, on the contrary, has a positive effect on USD value.
In addition to the direct, the oil rate also has an indirect effect on the dollar. To buy oil from other countries, the United States is forced to exchange USD for other currencies. For example, for euros. This happens, as the largest oil exporters in the world, such as the Arab countries, have chosen to switch to the European currency.
The US buys over 9 billion barrels of oil every year. To do this, they have to exchange USD for EUR. In other words, the US sells billions of dollars annually. This leads to a decrease in demand for USD, and as a result, to a decline in its value.
How to Use It
When trading the US dollar, don’t rely on oil prices alone. There are a number of other factors that can have a much larger impact. The change in the cost of a barrel will be especially noticeable during periods of calm in the foreign exchange market - when the economic and political situation in the United States is relatively stable. However, the cost of oil should not be overlooked. A sharp change in price will certainly pull the US dollar along with it.
And for those who trade oil, it is worth remembering the two-way correlation between financial markets. With a significant strengthening of the USD exchange rate for reasons unrelated to “black gold”, the cost of oil may significantly decrease. Conversely, a sharp drop in the US dollar could lead to the oil prices rise. You are free to use this correlation when trading the commodity market.
And Finally
Keeping track of oil prices is super easy. Just choose the method that is most convenient for you:
- Install the application on your phone to track the rates of the desired assets, such as oil or gold.
- Many operating systems today have built-in programs with this information.
- Subscribe to the daily newsletter of the data of interest, including the latest news on the commodity market.
- Track the oil related news in the economic calendar that you use to trade Forex.
See? It’s easy but very useful. Make sure to give it a try!