Dollar’s Relentless Rally Set for a Boost From Higher Oil Prices

Surging oil prices are set to power the next leg of the dollar rally, as the US economy benefits from its rise as an energy exporter.

(Bloomberg) — Surging oil prices are set to power the next leg of the dollar rally, as the US economy benefits from its rise as an energy exporter.

Strategists at firms including Societe Generale SA and State Street Trust & Co. expect the greenback to extend its longest weekly rally on record as the outlook for higher crude prices boosts the world’s largest economy. 

Unlike major countries in Europe and Asia, the US exports more oil and gas than it imports. So while rising energy costs threaten to weaken other economies — dragging currencies like the euro and the yen lower — the dollar actually stands to benefit, according to strategists at these firms.

“In this environment, you don’t sell the dollar,” said Societe Generale strategist Kenneth Broux. “Oil poses challenges for the euro and the yen to reverse the weakening trend versus the dollar.”

Broux forecasts the euro to drop to $1.05 this month from the current $1.07.

The Bloomberg Dollar Spot Index jumped to a six-month high this week as crude oil futures rose toward $90 a barrel, a rally of about 30% from this year’s low reached in March. The index is now on track for its longest streak of weekly gains since its inception, mainly at the expense of the yen and euro. Its correlation with oil prices reached 0.8 this week, the highest in nine months.

The latest oil surge coincides with a string of dire data showing the euro-area economy barely expanded in the second quarter, raising the prospect that the European Central Bank will have to downgrade its growth outlook and stop raising rates when it meets next week.

Higher oil prices might also fuel concern that Europe faces stagflation — a combination of weak economic activity and high consumer-price growth. That risk has dragged the euro lower in recent weeks.

The US energy trade balance stood at 5,102 kilotonnes of oil equivalent last year, while Europe posted a deficit of 502,788 kilotonnes, according to the IEA. The divergence could grow if Goldman Sachs Group Inc., RBC Capital Markets and others are correct in forecasting further crude price increases. 

“Europe is well into the danger zone and Japan is getting there,” said Timothy Graf, head of EMEA macro strategy at State Street, about the economic impact of higher oil prices. He adds crude prices only start to dent the US economy around $120 a barrel. “US inflation expectations do not look in any danger of getting unanchored.” 

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