The dollar strengthens and oil prices rise

Although the stock and bond markets have plummeted in the past two months, the US dollar has continued to strengthen
with its status as a "global safe haven", oil prices reported on May 30.

The dollar and oil prices are often negatively correlated because oil is priced in dollars, which makes it relatively more expensive
to buy oil in other currencies.

Oil prices and the US dollar have been rising since the end of March, reaching their highest positive correlation
since May 2019.

These are difficult times
for most investments.
The S&P 500 and Nasdaq have fallen for seven straight weeks, while the Dow Jones Industrial Average has fared even worse, falling for eight consecutive weeks, the longest losing streak since the Great Depression of 1932
.
So far this year, the S&P 500 is down 13.
9% and the Nasdaq is down 23.
1%.

At the same time, the 10% decline in global bonds looks modest compared to Bitcoin's more than 30% decline in 2022
.

But it's been a wonderful time
for the dollar.

The dollar index, which measures the greenback against a basket of six global currencies, is currently hovering near
20-year highs.
Since the beginning of the year, the dollar index has risen by 8%, and in the last 12 months, it has risen by 14%.

Earlier this month, the dollar index hit a 20-year high above 105 and is now less than 3%
below its peak.
The dollar's performance against the single currency is even more impressive, with the dollar appreciating more than 13% against the yen this year alone and 36.
30%
against the pound sterling in 14 months.

But a strong dollar has not stopped the development of a commodity, especially crude oil
.

The bull market in oil prices barely noticed the rise in the dollar and managed to break the historical inverse correlation between crude oil and the dollar, thus showing that there is still room for oil to rise based on current market fundamentals
.

Typically, dollar values are inversely
proportional to the prices of most commodities, including oil.
Historically, commodity prices have tended to fall when the dollar is stronger against other major currencies and rise
when the dollar is weakening against other major currencies.
Although this correlation is not perfect, there tends to be a significant inverse relationship
between the dollar and commodity prices over time.

Oil prices and the US dollar have been moving higher in the same direction since the end of March and recorded the highest positive correlation
since May 2019.

The usual negative correlation between oil and the US dollar remained unchanged
in 2020 and early 2021 as the global pandemic weakened crude oil demand.
But many analysts now expect this positive link to persist given the broader risks facing tight oil markets and the global economy
.

UBS analyst Giovanni Staunovo has said that "given the lower spare capacity, there may be greater supply disruptions in the future, and oil demand is likely to continue to increase, I expect oil to be mainly driven by its own fundamentals".

Given that crude oil is currently trading at around $115 per barrel, JPMorgan expects the overall average price of Brent crude to reach $114 per barrel in the second quarter, and even soar to more than
$120 per barrel at one point.

Another factor that has disconnected the strength of the dollar from oil prices is that the current energy crisis has hit Europe hardest, with Ehsan Khoman, head of emerging markets research at MUFG, saying, "Historically, both the energy crisis and inflation shocks have been concentrated in the United States, so the dollar is bearish
.
" Europe, the region most dependent on energy imports, now happens to be at the epicenter of the crisis and is already grappling with a severe energy trade deficit
.
Coal, natural gas and oil prices continue to remain high due to supply shortages, and the global economy outside the United States suffers more than the United States, leading to a stronger dollar.
"

In other words, it's no longer just the Fed's problem
.

As we all know, changes in the federal funds rate have an impact
on the dollar.
Whenever the Fed raises the federal funds rate, it usually raises interest rates
across the economy.
Higher yields attract investment capital
from overseas investors seeking higher returns on interest rate products such as bonds.

In turn, global investors sell investments denominated in their national currency for investments denominated in dollars, leading to a stronger exchange rate and a stronger
dollar.

The Fed's hawkish stance, including quantitative tightening, contributed to the early stages
of the dollar's rally.
However, concerns about energy security and major geopolitical turmoil in Europe are driving the second phase of gains, not only the dollar but also oil prices
.