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Strong US Dollar (USD) is Bad News for Crude Oil

US Dollar (USD) vs British Pound (GBP)

The US Dollar  has been strengthening recently, gaining value relative to other major currencies such as the British Pound . The gains against Sterling occurred because of the outcome of the referendum, which took place on the 23/06/2016. The leave campaign won by a small margin, causing international economic & financial shocks, as investors & firms lost confidence. The British Pound depreciated rapidly (down by more than 10% at some points on Friday) as it was reported that the UK electorate had voted to ditch the EU.

US Dollar - Oil

Many analysts, economists & politicians warned of the potential consequences of “Brexit”, with the International Monetary Fund saying “Such effects (Brexit) could over time erode London’s status as Europe’s preeminent financial center”.The IMF issued this warning in mid-June.

A strong American Dollar causes the value of crude oil to decrease. It should be noted that crude oil, & most world commodities (e.g. wheat, cotton, gold, copper & natural gas), are quoted in dollars. Therefore, an increase in the value of the American domestic currency means that oil is less affordable to traders or businesses using other currencies, thus, reducing demand for oil. This could lead to a fall in world oil prices.

FOREX & US Dollar Basics

The Foreign Exchange Market (FOREX) is the largest market by volume traded, with an average of $5.3 trillion being traded per day in April 2013. As there is no universal way of valuing a currency, it can only be valued in comparison to other currencies. Currency pairs (e.g. GBP/USD or EUR/USD) show the value of one currency in relation to another. The US Dollar  is the most traded currency internationally, & it is used as the primary currency of many countries other than the USA, including Lebanon.

US Dollar Surge Set to Continue

According to an article published on Market Watch yesterday, the US Dollar  could continue to gain against the British Pound, reaching parity (£1 = $1.) The article read “Investors should prepare for the British pound to hit parity with the U.S. dollar by the end of the year or early in 2017, said at least one analyst — and should parity happen, it’ll be a first.”

The source continued; “After last week’s surprise U.K. vote to exit the European Union trading bloc, sterling fell more than 12% against the dollar on Friday before trimming some of its unprecedented drop late in the U.S. trading day. But bears regained the upper hand on Monday, sending the currency to a fresh 30-year low at $1.3121.”

Although the depreciation of UK Sterling may be seen as negative for the economy, it could prove to be advantageous.

 

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