The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the exchange traded fund proxy for the U.S. Dollar Index (DXY), slid 1.45% last week, bringing its year-to-date loss to just over 3%.
UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The ETF’s struggles to start 2018 are prompting some traders to boost bearish positions on the fund. The dollar’s bearish gyrations are proving to be good news for oil and the related exchange traded products.
For example, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, gained 3.8% and 1.8%, respectively, last week.
“There has long been a solid link between the direction of the U.S. dollar and oil prices,” reports OilPrice.com. “Because oil is denominated in dollars, a weaker dollar makes oil more attractive to all other currencies. That helps stoke demand for crude, so when the dollar drops, oil tends to rise. As such, the decline of the dollar helped push WTI and Brent to new multi-year highs this week.”
For its part, OPEC remains concerned about the level of production by U.S. shale producers and the cartel is urging its U.S. rivals to pare output to support prices. According to the Energy Information Administration, crude oil product could hit 9.9 million barrels per day in 2018, which surpasses the prior high reached in 1970 of 9.6 million barrels per day.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could prompt more upside for oil this year.
“However, the dollar’s role in fueling the bull run for oil does not mean that current trends will continue,” according to OilPrice.com. “With the dollar at its weakest since 2014, the U.S. government could make more hawkish statements to shore up confidence in its strong-dollar policy. Any rebound in the strength of the dollar could upset the oil price rally.”
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