Hedging against the Dollar

Reading an article by Cline and Perry (2013) I came across a paragraph about the relationship between oil prices, the Dollar and of course Exchange rates.

In this article aptly named “Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View” Cline and Perry argue that oil is endogenous through the effects of the exchange rate. When oil is sold by OPEC countries they receive dollar denominations, which then need to be converted into the local currency. It is argued that as the dollar falls in value OPEC oil prices rise to meet profit quotas.

Therefore as the dollar falls in value the price of oil rises. It is also argued on the other hand that when the dollar rises in value OPEC increase the production of oil, therefore decreasing its price.

As an investor this offers a tool in which to hedge against a falling dollar. History shows evidence that this might be the case, as shown in the graph below:
USD and Oil

Let me know your thoughts on this relationship: @Breadeconomics



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s