How Strengthening US Dollar Will Help Stabilise Crude At Lower Levels

The value of the US dollar has been on a tear for more than a year against several currencies, including the British pound, Indian rupee, South Korean won, etc. 

The dollar is near its highest level in more than two decades against a key index measuring six major currencies, including the euro and Japanese yen. Many professional investors don’t expect it to ease off anytime soon.

The dollar’s rise affects nearly everyone, even those who will never leave the US borders. 

Here’s a look at what’s driving the U.S. dollar higher and what it can mean for investors and households:

Essentially that one dollar can buy more of another currency than it could before. Consider the Japanese yen. A year ago, $1 could get a little less than 110 yen. Now, it can buy 143. That’s about 30 per cent more and one of the biggest moves the U.S. dollar has made against another currency.

The US Dollar index, which measures the dollar against the euro, yen and other major currencies, has climbed more than 14 per cent this year. The gain looks even more impressive compared against other investments, most of which have had a dismal year. U.S. stocks are down more than 19 per cent, bitcoin has more than halved and gold has lost more than 7 per cent.

Meanwhile, strength of the US Dollar will lead to crude stabilizing at lower levels, brokerage firm Emkay says.

China lockdown, supply by OPEC, rise in US production, and price capping by G7 has led to softness in crude.

Brent is currently trading below $90/barrel after its attempted recovery to the $104 level in a retest of the earlier highs while it faces resistance around $106-107 and it could retest those levels case of a surge in prices.

The fall in Brent crude prices is largely due to four important factors.

In pursuit of the zero COVID policy, China has shut down Chengdu city one of the biggest cities with a huge population of almost 21 million. Historically a lockdown in China has led to a softening effect on oil prices.

The OPEC supply has been steadily rising. The supply per day has been 29.60 million barrels. This is said to be the highest supply since the pandemic, that is, since March-April 2020.

The positive news about supply has been further strengthened by a sharp rise in US production which has now touched 11 million barrels per day. This is the highest production since early 2020.

Lastly, there is a move by G7 countries to cap the price of oil from Russia. Russia has objected to this, however, this might cool down prices in the immediate term.

Over and above all these factors, there is an emerging fear of a likely recession pulling down the global economy in the coming months. Inflation has been on an up move consistently, contrary to the belief earlier that it is transient at best. 

To contain the runaway inflation, central banks in the US and Europe have launched an aggressive monetary policy in terms of rate hikes as well as reversing the easy liquidity that was introduced to aid growth during the pandemic years. The US and ECB are still not done with their rate tightening, and the street expects further tightening. The pace of the rate action may hurt economic growth in the near term, affecting demand for crude worldwide.

The rate action has also led to a strengthening of the US Dollar. A stronger dollar will gradually ensure that crude prices will stabilise at lower levels.

(With AP inputs)