Oil price link to U.S. dollar strongest in 14 months

By Alejandro Barbajosa

SINGAPORE (BestGrowthStock) – Oil prices are more dependent on dollar fluctuations than at any time in the last 14 months as speculation intensifies that the U.S. Federal Reserve will embark on a fresh round of monetary stimulus to boost recovery.

The inverse correlation between U.S. crude and a gauge of the greenback’s value against a basket of major currencies (.DXY: ) on Tuesday reached its highest since August 24, 2009, data compiled by Reuters showed.

For a graphic: http://graphics.thomsonreuters.com/AS/0810/ABE_20102610125548.jpg

Oil stocks at top consumer the United States have come off record highs earlier this year, while soaring demand from emerging economies is helping drain a persistent surplus. But the dynamics of traditional supply and demand factors are being overshadowed as the effect of currency flows prevails, with prices stuck between $70 and $85 for most of 2010.

“Oil in itself is treated as an investor asset, rather than a consumption asset or a physical good,” said Serene Lim, a Singapore-based oil analyst at ANZ.

“With excess liquidity expected to come into the market, it’s a commodities play as part of a riskier asset class.”

Correlation can show how related price changes of two assets are to one another, and is measured in a scale from minus one to plus one. A value of zero indicates no link, while the closer a reading gets to the extremes, the stronger the correlation, inverse if negative and direct if positive.

An inverse correlation means the two variables move in opposite directions, while a direct correlation implies they move in tandem.

Oil is most often inversely correlated with the dollar because a stronger U.S. currency hurts the purchasing power of holders of other currencies, while a weaker greenback renders oil imports of the dollar-denominated commodity cheaper for them.

The inverse correlation between U.S. crude and the dollar measured against the currency basket jumped to -0.7522 on Tuesday from -0.6105 a day earlier, when the dollar tumbled to a 15-year low against the yen.

It reached a record -0.7885 on November 4, 2008, as oil was plummeting from almost $150 a barrel in July of that year to less than $35 by December. Over that period, governments around the world orchestrated the biggest monetary stimulus of all times in an attempt to fend off the deepest recession of the post-war era. In a mirror image of oil’s inverse correlation with the dollar, the direct correlation between U.S. crude and the euro is now at its highest since March, after a weekend Group of 20 meeting that produced no firm policy initiatives reassured investors that market trends would remain unchanged.

(Editing by Manash Goswami)

Oil price link to U.S. dollar strongest in 14 months