Is USD a commodity currency now? Forecast as of 16.10.2023

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In recent years, as the United States has transformed from a net importer of energy goods to a net exporter, the USD index and oil correlation has increased sharply. Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly US dollar fundamental forecast

The armed conflict in the Middle East has sharply increased the demand for gold and US Treasury bonds. Treasury yields initially fell and then stabilized at lower levels than at the beginning of the second week of October. However, the USD fully recovered after the fall in debt market rates. Is yield no longer the main driver of the EURUSD decline?

Attempts to explain the USD strengthening by its status as a safe-haven asset look skeptical. In fact, when US debt rates fall, gold, the yen, and the franc begin to act as safe-haven assets. The US dollar, in turn, supports rising oil prices caused by the armed conflict in the Middle East.

New approaches to production, especially hydraulic fracturing and horizontal drilling, have made the United States a net gas exporter. Since 2019, the US has been a net supplier of energy goods in general. The US dollar now reacts to changes in oil prices in the same way as the Canadian dollar. That is, it strengthens during the Brent and WTI rally and falls when oil prices decline.

Dynamics of the US dollar and oil

Source: Financial Times.

The growing correlation between the USD index and oil creates additional difficulties for the global economy. The situation looks especially problematic for the currencies of oil-importing countries. The strong US dollar and high energy costs cause them double damage. The Euro is no exception. A bullish oil market is worsening the current account and terms of trade. It is not surprising that the IMF, in its latest review, raised its forecast for US GDP growth and downgraded the estimate for its European counterpart.

Currency weakness increases the risk of a new round of inflation. This puts additional pressure on central banks, which recently stopped tightening monetary policy. The ECB also signaled that the deposit rate will remain at 4% for a long time. At the same time, the head of the Bank of Spain, Pablo Hernandez de Cos, notes that the recent rally in eurozone bond yields was due to rising US debt market rates and not to expectations of a continuation of the ECB’s monetary restriction cycle.

Everything in the world is interconnected. Rising Treasury yields, a strong dollar, and an oil rally are putting additional pressure on the global economy. Its prospects look bleaker than those of the United States. As a result, EURUSD bears will be able to take advantage of American exceptionalism. Moreover, experts surveyed by the Wall Street Journal reduced the chances of a recession in the US economy in 2024 from 54% to 48%.

Weekly EURUSD trading plan

Thus, the dollar becomes a commodity currency and takes advantage of rising oil prices to maintain its leadership position in Forex. If there is no sharp decline in Treasury yields shortly, a breakout of the support at 1.0495 will increase the risks of a continuing EURUSD decline in the direction of 1.0415 and 1.035.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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