I know oil is traded in dollars, but I don鈥檛 quite understand why an increase in dollar value lowers oil prices, or a decrease in dollar value raises oil prices.
Assume I am a UK investor and I have a bank account in GBP. In order to buy barrels of oil I will need to exchange these GBP for USD. Clearly, the higher the value of the USD, the more it costs me in GBP to purchase these USD. Therefore, I don't understand how a stronger dollar still lowers the price of oil. Now, obviously, there is something wrong with this logic, but I am unsure where?Why does an increase in value of the US dollar lower the price of oil and vice-versa?
An increase in the exchange rate of the US dollar relative to other currencies decreases the demand for oil from foreigners who must exchange their currency into US dollars in order to buy oil. Because with stronger US dollar, these people get fewer US dollars for the same amount of their currency.
Due to unfavorable exchange rate, foreigners have less money to buy oil with. And when people don't have the money to buy. Then the price of oil goes down due to decreasing demand.Why does an increase in value of the US dollar lower the price of oil and vice-versa?
It is because since oil is traded in dollars, a stronger dollar increases the dollar's purchasing power parity, thus making oil cheaper for all countries. The reduction in the price of oil is reflected in the increased purchasing power parity of the dollar.
The price of oil is always in terms of the US dollar. So when the US dollar is worth more, it takes less dollars to buy oil. And when the US dollar is worth less, it takes more to buy the oil.
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