Link of the Dollar to the Oil Price is Weakening

By Rhod Mackenzie

Analysts at JPMorgan, have concluded that the correlation between the strength of the dollar and oil prices is weakening. Moreover, thishas happened mainly because literally every day more and more transactions in the oil markets take place not in dollars, but in national currencies. The conclusion that the American dollar is gradually losing its leading position in the oil markets confirms the now very popular topic of dedollarization, i.e. abandoning the US dollar and switching to other currencies.

“The American dollar, one of the main drivers of oil prices on the global market, is losing its former importance,” Business Insider quotes Natasha Kaneva, the head of commodity markets strategy at JPMorgan.

The bank's analysts reached this conclusion by analyzing the impact of a strong dollar on oil prices. There has always been an inverse relationship between the dollar and oil prices, i.e. when the dollar was strong, oil prices were low and vice versa. The explanation for this dependence is simple - almost all trade in “black gold” is carried out in dollars. So when the price of the US currency rises, the demand for oil falls. In 2005-2013, a 1% increase in the trade-weighted value of the dollar, according to JPMorgan, led to a decrease in the price of oil by approximately 3%. However, now this pattern is changing, in 2014-2022. a 1% rise in the dollar led to a decrease in oil prices by only 0.2%. The authors of the JPMorgan study explain these changes by the fact that now every day more and more oil is not sold for dollars.

China is the world's largest oil importer. Beijing bought almost all of its Russian oil for yuan last year, Reuters reported in May.

Kaneva also emphasizes in the study that Russian oil is sold in the currencies of the parties to the transaction or in the currencies of countries friendly to Russia.
"Overall, we found that the dollar's importance will decline significantly between 2014 and 2022," said Jahangir Aziz, the head of emerging markets at JPMorgan.

It's a change that's hard to ignore, he says, even if the US currency is currently strong thanks to the recovery from the coronavirus pandemic and geopolitical tensions. Of course, it is hard to argue with the fact that the dollar retains its dominant position in the global financial system. Suffice it to say, for example, that its share of transactions in the SWIFT payment system will exceed 40% by July 2023, much higher than that of the euro (around 25%) and the yuan (around 3%).

JPMorgan expects a marginal de-dollarisation and believes that it will be slow because the dollar is still very widely used in the global financial system.

This is not the first time JPMorgan has analysed de-dollarisation. In June, when the dollar's share of foreign exchange reserves fell to a record low: 58% from 73%, the bank's analysts saw the signs of de-dollarisation.