As you can see, the denominator of goods and currencies has the American dollar, the exception is the reverse currency pairs, but this is only mathematical casuistry for the convenience of quoting these currencies. It is logical to assume that when the dollar exchange rate rises, the exchange rate of currencies and goods decreases, and vice versa, the depreciation of the dollar leads to an increase in currencies and commodity markets.
As follows from diagram 4, in the period from July 2014 to July 2017, oil and the dollar correlated with each other with a coefficient of -0.75, i.e., they were inversely correlated. At the same time, the linear correlation of the EURUSD rate and Brent oil at certain time periods can reach a coefficient of 0.9, i.e., be very high.
In the previous paragraph, I knowingly highlighted the expression: “at certain periods of time.” The ability to determine the periods when a particular factor affects quotes lies in the art of the trader and the level of his training. There are no unambiguous examples and schemes; everyone will have to go this way on their own. However, it should be noted that the effect of oil prices on foreign exchange quotes increases during periods when the difference in interest rates is small, as in 2014 – 2017, and decreases when the potential for interest rates increases, as could be observed in 2018 – 2019.
Analyzing the relationship between commodity prices, oil, and the foreign exchange market, it should be noted that the study of the correlation between these assets has low efficiency. Traders who nevertheless decide to independently research this issue, it is better to focus on the analysis of quotes with the help of oscillators, for example, the Stochastic indicator or RSI, allowing you to move away from absolute values, to the percentage change in some assets relative to other assets.
We live in a hydrocarbon economy, and oil and its derivatives are the main commodities, the price of which affects all other sectors of the economy. This is also reflected in commodity indices. As follows from the diagram (2), energy carriers make up 33% of the composition of the Thomson Reuters / CoreCommodity CRB index, and this is not counting natural gas. The Deutsche Bank Commodity Index comprises about 50% of oil and oil products.
Thus, a change in the price of oil leads to changes in the entire commodity market, from which we can deduce the dependence – a decrease in the dollar, leads to an increase in the price of oil, and an increase in the exchange rate of foreign currencies; and vice versa – an increase in the dollar exchange rate leads to a decrease in oil prices and a decrease in foreign exchange rates.
The beginning and end of this relationship cannot be determined. For example, the euro may decline, which will lead to an increase in the US dollar, which in turn will lead to lower oil prices. Or oil may start to grow, which in turn will lead to a decrease in the dollar, and a decrease in the dollar will lead to an increase in the euro.