Co-movement of the Dollar and Oil Prices… Liberty Street Economics

Liberty Street Economics is the excellent series from the New York Fed… Here is a recent posting:  Thomas Klitgaard, Paolo Pesenti, and Linda Wang, “The Perplexing Co-Movement of the Dollar and Oil Prices,” Federal Reserve Bank of New York Liberty Street Economics (blog), January 9, 2019, https://libertystreeteconomics.newyorkfed.org/2019/01/the-perplexing-co-movement-of-the-dollar-and-oil-prices.html.

The authors conclude and warn:

”Conclusion and Caveat
The observed correlation between oil prices and the dollar is difficult to explain. The argument underlying this blog post is that it is unlikely that changes in the dollar drive changes in oil prices. So, why would changes in oil prices cause changes in exchange rates? Or is it that there are other variables that systematically influence both, creating the observed correlation? We have considered a number of possible narratives, suggesting some paths for future research. Of course, the caveat is that the correlation has not been around for very long, so one should be cautious in reading too much into it. The longer this correlation persists, however, the more it will deserve a convincing explanation.”

Here is the CME’s cross-asset correlation tool which shows the six month correlations among various futures contracts… Note the lack of correlation between crude oil (CL) and the euro (6E), the pound (6B) and the yen (6J)…

My sense is that explaining crude price movements by noting dollar movement is way overdone…