Conventional wisdom says that a strong dollar is bearish for oil prices and vice versa. The logic is unquestionable. Countries with relatively weak currencies are disincentivised to consume oil. Producers are tempted to pump as hard as they can, simply because oil is worth more in their currencies. Additionally, servicing dollar-denominated debt hinders economic growth when the greenback is strong, adversely impacting domestic oil demand.

This inverse relationship, just like any other correlation between different asset classes, is not static. In fact, from 2024 to date, the most salient currency pairing, the $/€ exchange rate has a meager 11% correlation with the U.S. crude oil benchmark on a daily settlement basis. When the dollar and oil go hand in hand, it happens for one of two reasons: either the global and, within that, regional economies are robust enough to weather the negative effect of a strong dollar, or the U.S. economy is struggling, impeding global growth.

The latter has been a rare phenomenon; however, since the current U.S. administration launched its protectionist trade policies, trust in the world’s biggest economy as a reliable trading partner has diminished. Consequently, the dollar has fallen out of favor amongst investors as a safe haven. It has been moving lower in tandem with oil prices since the Presidential inauguration on January 20, registering a positive correlation of 83% in the last three months. The same trend is observed with other currency pairings. (The recurring divergence and oil strength observed at the time of writing, April 16 and 17, is the function of growing concerns of Iran-related sanctions and not brighter economic prospects.) 

The “exorbitant privilege” the dollar has been enjoying as the world’s most important reserve currency in the past 50 years is not in jeopardy yet, notwithstanding central banks’ dollar reserves on a steady decline of late. The protracted threat of trade wars and the somewhat unpredictable U.S. economic policymaking, however, envisage headwinds for growth, keeping the dollar under pressure. Unless the greenback regains its credibility with investors, it will not be able to provide considerable support for oil demand and oil demand growth. In the present investment climate, conventional wisdom has been upended and a weak dollar is deemed bearish for oil prices, at least from the demand perspective.