The Rise of the Petrodollar

The WTI crude oil price has made a new high for the year. It traded close to $80/barrel on Tuesday after the OPEC+ decided to stick with the current production plan. At the same time, the U.S. dollar is at its 2021 highs, reflecting the sharp improvement in the U.S. terms of trade.

The year 2021 brought a continuation of the bullish trend in the crude oil price from last year. After OPEC+ decided this Monday to stick with the current production plan, the oil price reached a new high for the year, trading close to $80 per barrel.

But so did the U.S. dollar, as reflected on the chart below by the EUR/USD exchange rate, which dropped close to 1.15 after starting the year from above 1.23. Is there a direct correlation between higher oil prices and a stronger dollar?

The U.S. – A Major Commodity Producer

The U.S. dollar and oil are both up significantly this year, and it may not be a coincidence. The United States is a net oil exporter, and the rising oil prices improve the terms of trade significantly, sparking a rally in the greenback.

As a major commodity producer, the U.S. stands to benefit from higher commodity prices, and the local currency, the U.S. dollar, should benefit. It explains at least part of the U.S. dollar’s rally in 2021, and traders should have an eye on the oil price before deciding to buy or sell the dollar.

As long as the U.S. maintains its position as a major commodity producer, the dollar will find support from rising commodity prices – especially from rising oil prices.