Oil's Slippery Dollar Link
For oil prices, subject to such vagaries as Nigerian politics and Atlantic winds, rules of thumb are alluring.</br></br>One currently in vogue is that oil, priced in dollars, rises as the greenback falls. Working the other way, expensive oil widens the U.S. trade deficit, undermining the dollar.</br></br>Both arguments offer only a partial explanation. Oil has roughly doubled since February as the dollar fell 15% against the euro. But oil also roughly doubled in 2004 and 2005 while the dollar held steady.</br></br>Similarly, the U.S. trade deficit is subject to factors other than oil. For example, it ballooned in the late 1980s, even as oil prices sank. Meanwhile, Marc Chandler, author of "Making Sense of the Dollar," questions how much trade deficits really drive the dollar anyway. While increasing U.S. exports coincided with a weakening dollar earlier this decade, exports were likewise on a roll in the late 1990s, when the greenback was also strong.</br></br>Changing correlations between the dollar and different assets suggest cyclical factors rule. The late 1990s and the middle part of this decade both saw strong U.S. economic growth and high or rising interest rates. Those contexts supported the buck, regardless of what oil was doing.