The Relationship Between the Dollar and Oil ETFs
September 19th 2007 at 2:55pm by Tom Lydon
As the dollar declines, we know a few types of exchange traded funds (ETFs) benefit: commodities, foreign currencies, gold and oil. Even with the Federal Reserve’s rate cut, the dollar ended yesterday down half a percentage point at a record low, says James Picerno for The Capital Spectator.
The relationship between the dollar and oil prices is a tricky one. Rising oil prices and declining dollar values could indicate that inflation is on the way. The U.S. is the world’s largest importer of crude oil and as such, when our dollar weakens, it forces exporters to raise oil prices, causing inflation. Because oil is a global commodity, creating a set price is not an option. If OPEC can’t set standard prices to keep oil prices from rising, then the only other option is to limit supply, Picerno explains. OPEC also needs technological upgrades because of the increased global demand for oil. That leaves OPEC in the tough spot of having to come up with a way that they can be paid properly as well as get the upgrades they need to keep up with demand.
The Federal Reserve, on the other hand, does not see any correlation between the high oil prices and inflation. The Fed sees oil prices as a separate issue when it comes to monetary policies. Time will tell if there is a correlation linking oil, currency and inflation.
Investors looking at the rising price of oil, may look to some oil related ETFs. United States Oil (USO), which is up 20.3% year-to-date, is supposed to track the price of oil. However, keep in mind the risks of contango.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.