Ways2Capital Reviews : The Fed Is Driving Down Oil Prices

The US dollar has jumped to its strongest level in nearly a year, raising questions about how a strong greenback could act as a drag on debt and oil demand in much of the world.

The US Federal Reserve announced another rate hike a few days ago, which helped edge up the dollar to a new high for the year.

The greenback has "a little room to run," Kathy Jones, a New York-based chief fixed-income strategist at Charles Schwab, said in a Bloomberg interview. "We have seen softer numbers out of Europe and firmer numbers out of the US."

The US Federal Reserve is unwinding its extraordinary monetary intervention after a decade of near-zero interest rates. The Fed has announced quarter-point interest rate hikes twice and is planning on at least two additional increases this year.

Meanwhile, the European Central Bank is heading in the other direction in an effort to keep sovereign bond yields from spiraling out of control, particularly after the recent political turmoil in Italy unnerved bond markets on the continent. The ECB said it would keep interest rates low through at least next summer.

The diverging policy paths for the two central banks points to a further strengthening of the dollar relative to the euro. The Bloomberg Dollar Spot Index jumped to 1,187 in early trading on Friday, the highest level since July 2017. The greenback has strengthened about 6% in the past two months.

"(ECB President Mario) Draghi came out a little bit more dovish than people thought he was going to be. And that really caused the euro to take a dip and the (US) dollar to go up, which is putting downward pressure on prices," Phil Flynn, analyst at Price Futures Group in Chicago, told Reuters.

There are plenty of factors influencing oil prices right now, and the OPEC+ decision expected in a few days will be the single most important driver in the near-term. But the US dollar is one important variable influencing oil prices. A stronger dollar helps push down prices because it makes oil, which is priced in dollars, much more expensive in much of the world.

Moreover, emerging markets now account for a majority of oil demand, and nearly all of the growth in oil demand. More specifically, additional consumption over the next few decades is expected to overwhelmingly come from China and India. In 2018, the two countries have accounted for nearly 70% of oil demand growth.

As a result, actions from the Fed reverberate through the oil markets. Higher oil prices act as a drag on demand, but a stronger greenback magnifies the expense in local currency

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