Oil, Dollar Form Record Negative Correlation
June 9th, 2008Mmm hmm.
Via: Bloomberg:
When leaders of the Group of Eight industrialized countries meet June 13-14 in Japan, they may look to the joint actions taken ahead of a similar event in 2000, when oil prices were surging and a major currency was at a record low.
On Sept. 22, 2000, U.S. President Bill Clinton ordered the release of oil from the nation’s strategic reserve as crude had reached a 10-year high. Concurrently, the central banks of the U.S., Europe, Japan, U.K. and Canada bought euros in the first- ever concerted attempt to stem the currency’s slide, after it fell below 85 U.S. cents for the first and only time.
“The market has linked a weaker U.S. dollar to higher oil prices, and vice-versa,” DBS Group Holdings Ltd. said in a report. “That’s why a lot is riding on the weekend meeting.”
The chart of the day shows the correlation between the daily percentage change in the dollar index and crude oil, which formed a record negative last week. The link between the two peaked in positive territory on December 18, 2000, shortly after the unprecedented dual intervention and a Supreme Court ruling that cemented George W. Bush’s election victory over then-Vice President Al Gore.
The chart also shows that the most-recent positive correlation was in September 2007, after the Federal Reserve started cutting its benchmark rate in response to the worsening U.S. credit crisis.
Lowering Expectations
The negative correlation is “either because people are marking down their expectations for the U.S. outlook, or oil exporters wanting to preserve their returns do raise the price,” Sophia Drossos, chief currency strategist at Morgan Stanley and former manager of the Federal Reserve’s foreign-exchange portfolio, said in an interview June 6.
“We should see that negative correlation — that inverse correlation — persist, and if we do see energy prices rise, I think the dollar will fall,” she said.
The G-8 — the U.S., Japan, Canada, Germany, France, U.K., Italy and Russia — along with China, India and South Korea, which will also send officials for meetings on the sidelines, account for about 65 percent of global energy demand.
The negative oil-dollar correlation wasn’t the only record set last week. Oil rose $10.75, or 8.4 percent, to $138.54 a barrel in New York on June 6, the biggest-ever gain in dollar terms. The gain alone almost equaled the lowest price for a barrel of crude the past decade, set Dec. 10, 1998.
“The negative correlation is “either because people are marking down their expectations for the U.S. outlook, or oil exporters wanting to preserve their returns do raise the price,” Sophia Drossos, chief currency strategist at Morgan Stanley and former manager of the Federal Reserve’s foreign-exchange portfolio, said in an interview June 6.”
Makes sense to me!