Q. Lately Brent Crude has been rallying while the US Dollar has been falling. Could you tell me why this is happening and is this common?
A. There are a couple of reasons why this is:
#1: Commodity Pricing
Remember Brent Crude is a major global oil benchmark.
Oil prices, including Brent Crude, are typically denominated in US dollars on international markets.
When the US Dollar depreciates, Brent Crude becomes cheaper in other currencies.
This can lead to higher demand for Brent which helps push the price up.
#2: Safe haven status
Investors are always looking for safe-haven assets when the US Dollar drops.
A weaker dollar drives investors towards commodities like oil as alternative investments.
#3: US Exports are cheaper
When the US dollar depreciates, it makes US exports cheaper which can boost economic activity internationally,
This can lead to more demand for commodities like oil. And this helps to boost the price.
#4: Energy Sector Investments
When the US dollar weakens, investments in the energy sector go up.
This includes exploration and production activities which will help attract investors into buying oil.
In other words, a depreciating dollar will lower operational costs (in US dollar terms) in the energy sector outside the US.
And this will also help push up the oil price.
Final words.
We need to understand that even though the correlation is negative between the US dollar and Brent crude price, the relationship between them is complex.
And they are influenced by many other global economic dynamics, investor behavior, and supply-demand fundamentals.
