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Dollar cycle may be about to turn, supporting oil prices

London, The U.S. dollar has recently appreciated to its highest level in real terms since the start of 2017 and before that September 2003.

Dollar appreciation weighed on oil prices in 2018 as prices in some non-dollar currencies hit record levels earlier in the year and dampened consumption growth.

Yet there are signs that the dollar's rise may be coming to an end as trade tensions with China weigh and pressure to raise rates dissipates, lifting prospects for oil prices to recover, Reuters quoted John Kemp.

For now, dollar strength has helped hold down U.S. inflation even as unemployment has fallen to its lowest level in decades.

But it has contributed to a worsening trade deficit and cut the dollar value of overseas earnings of U.S.-based companies.

The United States is currently running a mix of expansionary fiscal policy (tax cuts and increased spending on the military) and a less accommodative or contractionary financial policy (rising interest rates).

The consequence is an improvement in the trade-off between employment and inflation (internal balance) but a deterioration in the trade deficit (external balance).

Exchange rate movements have suppressed inflation despite the booming economy but at the cost of declining international competitiveness despite tariffs.

In the short term, lower oil prices have been an important part of global rebalancing and will support economic activity in consuming countries and ultimately buy back some demand growth in 2019.

But a scenario with lower U.S. interest rates, dollar depreciation, easing trade tensions and an improving global economic outlook could ultimately help push oil prices higher.

Source: Saudi Press Agency

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