The Slippery Dollar

Once again we saw oil prices and the dollar moving in opposite directions. Since oil and other commodities are priced in dollars, it would make sense that the weaker the US dollar, the more it costs to buy a barrel of oil priced in US dollars. At some point, however, this relationship, called correlation, will ‘decouple’. Not completely, but the relationship will not be as strong. For example, PPI, a measure of wholesale prices, was reported today well above expectations, which indicates that the inflation issue is still prevalent. If it persists, the FED may have to raise interest rates, resulting in an adverse affect on an already fragile economy, but causing a strengthening of the US dollar. Sure, this may put downward pressure on oil, but global demand, although slowing, is still strong, and many economists are expecting a pick up in demand after the olympics. To hedge our positions, we have exposure to both oil prices as well as dollar strengthening. If they continue to be negatively correlated, the result of our positions will be muted as they move opposite each other. However, as I have mentioned in previous posts, I’m bullish on oil and I am also bullish on the dollar. It’s just a matter of time.