We don’t expect dollar/oil correlation to stay positive for long

Despite their recent positive correlation, we think that oil and the dollar will go in opposite directions before long: we continue to think that oil prices will fall back as the supply situation improves, while we expect the greenback to stay strong against a backdrop of a hawkish Fed and a slowing global economy.
Jonas Goltermann Senior Markets Economist
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FX Markets Weekly Wrap

Fed guidance could revive the rally in the US dollar

The trade-weighted US dollar seems set to end the week a bit higher, reversing some of its recent decline. But the dollar strength has mostly been against G10 currencies; despite the fall in US equities this week, the “riskier” emerging market (EM) currencies have generally risen. We doubt this pattern will last, as we expect tighter financial conditions from rising US Treasury yields to put renewed pressure on most EM currencies. Indeed, we expect the Fed to signal a rate hike in March and an accelerated pace of quantitative tightening when it announces policy next Wednesday, which could prove the next catalyst for a stronger greenback.

21 January 2022

FX Markets Outlook

We expect the dollar bull market to continue

Although the dollar’s rally has stalled over the past six weeks or so, and may tread water for a while longer, we think that it will ultimately appreciate a bit further this year and next. The key driver of the greenback’s rise since the middle of last year has been the Fed’s increasingly hawkish stance in response to a robust economic recovery and surging inflation pressures in the US. We expect that the Fed will deliver at least as many rate hikes as now discounted in money markets, and a significantly more aggressive pace of “quantitative tightening” than in the previous tightening cycle. In contrast, we think many other central banks will fall short of the pace and/or extent of monetary tightening that investors now appear to expect. In other words, we anticipate that rate differentials will continue to shift in favour of the greenback. We also think that the Fed’s apparent desire to tighten financial conditions in the US (which, if successful, would almost certainly affect global conditions) will continue to keep riskier currencies, especially in emerging markets, under pressure.

20 January 2022

FX Markets Weekly Wrap

We do not expect the recent dollar weakness to last

Despite several events in the US this week which would usually point to a stronger dollar – the highest US inflation print since the early 1980s, hawkish comments from both Chair Powell and Vice Chair Brainard, and a sharp rise in short-dated government bond yields relative to those in most other countries – the greenback fell this week. We think there are several possible explanations, including rising commodity prices, rotation out of the US tech sector, stretched long dollar positioning, and the fact that US money markets have already priced in a fairly aggressive rate path.

14 January 2022

More from Jonas Goltermann

FX Markets Weekly Wrap

Currencies stay mostly calm amid carnage in bond markets

Currency markets remained remarkably stable for most of this week, although the US dollar is rallying sharply today on the back of data showing very strong wage growth in the US, even as a major reassessment of the pace of monetary policy normalisation in developed economies led to a sharp sell-off in short-dated government bonds and interest rate contracts. The ECB and the BoC both delivered hawkish messages at their respective policy meetings, continuing a trend among major DM central banks. But while interest rate expectations rose and both the Loonie and the euro gained in the immediate aftermath of those policy announcements, neither has held on to those gains.

29 October 2021

Capital Daily

What to make of the dollar/oil relationship

The relationship between the US dollar and the price of oil is usually negative, but over the past two months oil prices have risen and the greenback has appreciated. While this pattern may persist for a while yet, we think it will not last and that eventually oil prices will fall while the dollar edges a bit higher.

27 October 2021

FX Markets Update

High-beta G10 rally built on shaky foundations

We think that the recent re-pricing of near-term interest rate expectations across most developed markets is overdone and that several of the “high-beta” G10 currencies will come under renewed pressure.

26 October 2021
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