US Dollar Index on the verge of breaking out to fresh 4-year high
The US Dollar Index continued to climb this week, for the 10th week in a row. Since all commodities are denominated in US dollars, options traders know that the price of basic commodities (including crude oil) are inversely related to the strength of the US dollar.
The US dollar is now at a critical juncture. The currency has been in a strong downtrend since 2002 which has coincided with one of the longest commodities bull markets in history. After hitting bottom in 2008 (when commodities prices peaked), the currency has been in a sideways trading pattern. The dollar is now on the verge of breaking out out to a 4 year high.
Although the media generally focuses on supply and demand trends, the strength of the US currency is the strongest contributing factor for all US denominated commodities. A strengthening US currency is therefore extremely bearish for all commodities, including crude oil.
Energy traders (and all commodities investors in general) should therefore keep a close eye on the currencies market in the next few weeks. This could provide vital clues on the direction of the crude oil market.