Why Does Oil Impact Currency Rates?

04 September 2008 - Which Way To Pay

    



Why Does Oil Impact Currency Rates?

Nations who are significant oil exporters can see strong correlations between the oil price and the performance of their currencies.  These are the so called "commodity currencies", which include the Canadian and Australian dollars (both of which have risen sharply with oil over the last 24 months).  Conversely, counties who rely in importing oil will see their currencies weaken as oil prices rise.  For the same reason, South Africa is heavily reliant on gold exports, and therefore the Rand can sometimes show a correlation with the gold price. 

There is also a long standing debate over the US dollar's affect on oil prices, and vice versa.  World oil has been priced in dollars since 1971, linking the two together.  When oil rises, the dollar tends to fall.  That makes oil price rises more significant to US buyers, but mitigates the impact of price rises for other nations, who receive more dollars for their currency as the dollar falls.

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