A strong dollar could cap oil prices

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Saturday, July 28
2018 07:38 / By Irina Slav for Oilprice.com

The strength of the US dollar raises a
obstacle to further gains in oil prices.

President Trump's trade war with China, which is still in its infancy, has
already beat the yuan. The dollar has gained more than 8 percent against
the Chinese currency since March. As Reuters points
out in
dollar terms the price of Brent oil has climbed 9 percent this year but in
the yuan's terms are now almost 14% more expensive.

But it's not just the yuan that was shot down from an ankle or two by the
dollar. The US dollar dollar
index
is at its strongest in one year, pushed by a constant rate
tightening
US Federal Reserve and strong GDP growth.

There is also a bit of feedback. As the Fed tightens rates
and inflates the dollar, emerging market currencies suffer sudden shocks,
sometimes serious. Argentina, Brazil, Turkey and South Africa have seen
significant depreciations in their currencies this year. As the capital runs away
emerging markets and flows into safe haven assets, such as the United States.
dollar, it only amplifies the divergence between the greenback and others

The problem for many emerging markets is that oil prices have risen
the same time. In general, oil prices are inversely proportional to the US dollar. A
a stronger dollar makes oil more expensive for much of the world, so oil prices
generally fall as the dollar rises. But the dollar and oil climbed
in tandem
for much of this year. This amplifies the pain for many consumers around the

Painful price increases threaten the demand for oil. To a certain extent, governments
around the world are trying to cushion
the blow
through price ceilings, fuel subsidies and currency support These markets
interventions from several countries could maintain growth in dive oil demand
Too, Bank of America Merrill Lynch said in a note in early June.

But these measures come at a huge cost to the public coffers, and might not be
enough to avoid the destruction of demand and / or the economic downturn. The blow to the oil
the demand will be much larger than it would be if the dollar had not
strengthened. Dealing with rising oil prices is one thing, but for motorists
in emerging markets to absorb double-digit price increases at the pump, driven
by weakening the currencies against the dollar, it is an entirely different thing.

Even Donald Trump is wary of strengthening the dollar, recognizing that
it poses challenges to the US economy. "I'm not delighted," Trump said in a CNBC interview
last week "Because we go up and every time you go up, they want to increase
rate again. I'm not really – I'm not happy about it. But at the same time I am

It's a strange position, however, since Trump's trade war with China is helping to
push the dollar and the yuan in opposite directions. The central bank of China has
also seized the opportunity to loosen its hold on the yuan, which will save it
to have to blow out huge sums of reserves to keep the currency fixed, as he did
during the summer of 2015. Of course, the United States complained to China for
years, requiring less intervention to artificially remove the value of the
yuan. Now that the yuan is flowing, Washington is not happy. "It's actually
shows the madness of the trade war, "said Zhang Bin, economist at the
Chinese Academy of Social Sciences, said
FT .
"China wants to promote a market-based reform [of the exchange rate].
that's what America has hoped for? "

Because China is a voracious consumer of commodities, including crude oil, the
aggravating effect of a slowdown in the Chinese economy and a weaker yuan
creates new headwinds for the oil market. In fact, even though oil prices have suffered
a correction in recent weeks, prices have not kept going down
trajectory even though other products have suffered a deeper rout. Copper,
for example, is down 18 percent since May. "An impending trade war and
uncertainty over Chinese demand weighs on commodity prices and
"Georgette Boele, currency and metals strategist at ABN Amro
Bank NV, narrated Bloomberg . "As long as
there is nervousness about China, raw materials will remain exposed to trade
war. "

Commodity prices are often a key barometer of global demand, that is to say
that the recent liquidation has some analysts worried about the health
of the world economy .

Oil Breakdowns in Venezuela, Libya and Iran Could Still Drive Up Oil Prices
much higher. But the strength of the US dollar is a major obstacle. If the
supply failures do not materialize, there is much more room for decline for
Oil price.

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