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    How strong is the relationship between the dollar and commodities?

    The dollar and its relationship with commodities has been talked about a lot recently. The sharp dollar increase in the second half of the year was blamed for the large sell off in the price of oil and other commodities, now that the dollar has given back some of its recent gains, the dollar sell-off is being seen as a contributing factor to the increase in the oil price.

    However, it is never as simple as that. While the dollar and oil do have a relationship – most oil transactions globally are conducted in dollars – we believe that there are other factors that need to be considered when determining the price of oil, for example:

    • Supply/ demand dynamics – the large oil supply has been a major factor that has weighed on oil prices this year.
    • External economic conditions, e.g., a slowdown in China, and, to some extent, a weak tone to US economic data.
    • Geopolitical issues: Brent crude jumped nearly 6% earlier on Thursday the back of news that Saudi Arabia had launched air strikes on Yemen.

    The diversity of oil price drivers makes it very difficult to pin down the exact nature of the relationship between the dollar and oil. We decided to do some correlation analysis to try and determine how powerful this relationship is.

    Correlation analysis: Oil and the dollar

    Since oil is priced in dollars, we are looking for a strong inverse correlation, with both assets moving in the opposite direction, to determine if the dollar is important for the price of oil.

    The first scenario looks at the correlation between Brent, WTI, and the dollar index. During this period the dollar has been rising, while oil has stalled. Here are a few findings:

    • Since the beginning of the year, Brent and WTI have had an insignificant correlation with the dollar index at -0.4 and -0.52 respectively. WTI is slightly more correlated to the buck, which is to be expected, as WTI is considered US oil.

    We also looked at the correlation over the last month, when the dollar has pulled back from recent highs, and the oil price has attempted to make a recovery.

    • This correlation has picked up since the start of March, rising to -0.51 for Brent, which is fairly insignificant.
    • The correlation between WTI and the dollar index since the start of March has become significant, with the dollar and WTI moving in opposite directions 64% of the time.
    • Interestingly, as the dollar has sold off the correlation with WTI has strengthened, since the 20th March WTI has moved in the opposite direction of the dollar 76% of the time, while the correlation with Brent has deteriorated, Brent has moved in the opposite direction to the dollar 31% of the time in the last 2 weeks.

    But what happens when the dollar falls? Back in 2010-2011 the dollar index fell more than 15%, while the price of oil rose nearly 30%. Here is what we found:

    • The correlation between Brent and WTI and the dollar index was insignificant at -0.4 and -0.39, respectively from mid2010- mid 2011.
    • The relationship became closer in the last 3 months of 2010, with Brent moving with the dollar 54% of the time, and WTI moving with the buck 50% of the time.
    • The relationship was fairly insignificant in 2011.

    The key findings from our study suggest:

    • Generally oil moves in the opposite direction to the dollar.
    • Oil and the dollar don’t have a meaningful correlation over the long term.
    • However, in the short term the relationship tends to be closer.
    • It appears that the dollar’s relationship with oil is closer when the dollar is rising, compared to when the dollar is falling, although more studies are needed to confirm this.
    • WTI has a more significant correlation with the dollar compared to Brent, when the dollar is rising. Both have a fairly similar correlation when the dollar is falling.

    What about gold?

    Gold is also priced in dollars and a lot has been reported on the relationship between gold and the buck. The latest comes from the World Gold Council, who released a report on Thursday that looked at gold in a rising dollar environment. It found that:

    • Generally there is an inverse correlation between gold and the dollar.
    • Its analysis found that the gold price increases more when the dollar weakens than falls when the dollar strengthens.
    • It also says that the relationship between gold and the dollar has changed in recent years, as demand for gold shifts East and the world moves to a multicurrency system.


    The relationship between commodities and the dollar is not symmetrical. It is based on multiple factors that cannot easily be quantified. Oil is also impacted by factors as diverse as supply/ demand and geopolitical tensions, and it can be difficult to predict the impact they have on the oil price. That being said, the relationship between oil and the dollar has strengthened in the past few weeks as the dollar has fallen back from recent highs.

    Overall, anyone who wants to trade commodities alongside the dollar should take account of a couple of things:

    • Although the dollar generally moves in the opposite direction to commodities, the correlation is only significant in the short-term.
    • WTI tends to have a stronger relationship with the dollar than Brent crude.
    • The relationship is not symmetrical, so don’t expect it to be reliable 100% of the time.
    • There are limitations to the oil/ dollar relationship, and the same limitations can be found with gold/ dollar.  

    Figure 1:


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