Dollar Enjoys Petrocurrency Status as Oil Drives Markets

As war spirals in the Middle East, one driver is increasingly overshadowing others when it comes to the US dollar: the price of oil.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — As war spirals in the Middle East, one driver is increasingly overshadowing others when it comes to the US dollar: the price of oil.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.In just a week, a historic surge in energy prices brought on by the US-Israeli attack on Iran has upended inflation and growth outlooks across the world. That includes the US, where Treasury prices have been sinking. The dollar, nonetheless, has marched higher. It’s rise has been catalyzed by the US’s position as the world’s top oil producer and by the dollar’s role as the currency for global crude trade, said traders and strategists.Bloomberg’s dollar gauge is up more than 1% since the launch of US and Israeli strikes on Iran on Feb 28. The greenback has rallied against all peers except the Canadian and Australian dollars, two currencies also highly linked to global energy prices. Brent crude oil futures have gained about 25%, meanwhile. As a result, a measure of the near-term correlation between oil and the dollar turned sharply positive this March.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.“The market has quickly realized that only a couple of trades work,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. “Those are oil and the dollar.” A Bloomberg analysis of activity in the options market tells a similar story. Some 60% of the activity observed this week in euro-dollar derivatives via the Depository Trust & Clearing Corp. was tied to bets that the dollar would rise against the euro. The average in January and February, conversely, was around 60% in favor of the euro. The shift likely reflects a market increasingly focused on the single currency’s exposure to energy imports. “Higher oil prices mechanically improve the US terms of trade and increase global demand for dollars to transact energy,” said Neil Sutherland, a portfolio manager at Schroder Investment Management. “At the same time, the US is structurally more insulated from an energy shock than most of the G-10, so relative growth expectations are shifting in its favor.”The dollar’s recent surge stands in contrast to a trend that’s been in place since President Donald Trump’s inauguration: dollar depreciation prompted in part by broader uncertainty surrounding US trade and economic policies. Despite the recent gains, Bloomberg’s dollar measure is still down some 6% over the last 12 months.Before the war started, the greenback was often negatively correlated with oil, trading down as oil prices rose, said Nicholas Wall, head of global FX strategy at JPMorgan Asset Management. Since Feb. 28, however, oil prices and the greenback have been rising in tandem, prompting some to refer to the currency as a petrodollar.The trend continued this week. On Tuesday, the Bloomberg dollar index slipped about 0.1% while the price of global benchmark Brent crude fell about 8%. On Wednesday, the greenback reversed losses as oil prices resumed gains.Still, the longer the conflict in the Middle East continues, the more sensitive US consumers — long attuned to prices at the pump — will be to rising oil prices. That could ultimately dent future growth in the US just as it will in other major economies around the world, which could be a drag on the currency’s strength in the longer term.“It’s a relative strength story, but I wouldn’t go so far as to say that the US dollar is a ‘petrodollar,’” said Kathy Jones, the head of fixed-income strategy at Charles Schwab. “The US economy will likely see a decline in GDP growth as a result of higher energy prices that affect consumer spending, so it isn’t a net positive overall.” What Bloomberg strategists say…“Oil is priced in dollars, global trade is financed in dollars and a vast stock of offshore liabilities is denominated in the greenback. When crude spikes, it is effectively a direct demand shock for the currency at the core of the petrodollar complex.”-Brendan Fagan, MLIV StrategistFor the full post, click here.Macro investors are increasingly torn as they consider both the price shocks of surging oil as well as the looming hit to global growth, said Christopher Gunster, head of fixed income at Fidelis Capital Partners. The market is selling Treasuries and buying dollars, he noted, which is a counterintuitive effect of the war.“You’re seeing the fight-to-quality and the inflationary impacts conflict with each other,” Gunster said.—With assistance from Alice Gledhill.(Updates pricing in third, ninth paragraphs.)Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. 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