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Dollar and crude oil price


The skidding of dollars against the major foreign currencies, especially Euro were constantly blamed for the seemingly unstoppable skyrocketing crude oil price. The logical explanation for this relationship often quoted was that crude is traded in dollar and the weakening the dollar is the major reason the higher crude oil and hence gasoline price paid at pump.

If the arguments for this negative relationship contributing to a high crude price. We would expect a significant correlations between crude price and dollar strength. Are there any significant correlations between oil and dollar?

Regressing crude price with dollar index (DXY), we did found the strong negative correlations between the two beginning early 2006 up to now. The correlations reached to the highest at -0.96 today. However, this relationship were neither stable nor constant over time. We can see from the attached chart (the green area represents positive correlations and red areas indicated negative relationships.) In 2005, crude price positively correlated with dollar, prior to that we saw a period of negative relationship in 2004. It seems that the correlations alternative between positive and negative during the last 5 years.

There is no question that correlation between dollar and crude prices became much stronger in the last year or so. But this correlation didn't mean that the depreciation of dollar caused the rising of oil price. The rising of oil price may be many different forces at work and dollar depreciation is certainly not helpful.

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