US Dollar: Driven by Crude Oil Prices and Speculative Fund Movements

■ Since March, the US dollar and crude oil prices have shown a high degree of correlation, with speculative capital movements likely playing a significant role.  

■ The weakening of the US dollar following the ceasefire agreement was primarily driven by speculative capital liquidation, and given the uncertainty surrounding the Middle East situation, this is expected to be a temporary phenomenon. 
 
   This article will summarize the main factors surrounding the US dollar exchange rate recently. As confirmed by PRESTIA Insight*1 released on March 31, the US dollar index rebounded from its low of 95.551 on January 27 this year, especially after the US and Israel launched airstrikes against Iran, and Iran effectively blocked the Strait of Hormuz, leading to a surge in crude oil prices, further strengthening the dollar's upward trend. On the other hand, with the news of a two-week ceasefire agreement between the US, Israel, and Iran on April 8 (Japan time), the previous upward momentum began to show its counter-effect, and the dollar weakened. 

 
The United States has undergone a comprehensive shale oil revolution since the 2000s and has become the world's largest crude oil producer by 2024. Therefore, in addition to the traditional logic of "buying the US dollar as a haven," the rise in oil prices since March has also driven up energy prices, including natural gas and coal. In the foreign exchange market, the trend of "buying the currencies of energy-exporting countries and selling the currencies of energy-importing countries" has attracted attention, thus reinforcing the strengthening of the US dollar. For example, the correlation between the typical currency pairs—USD/JPY and EUR/USD—and oil prices has significantly increased since the Middle East conflict. Observing the correlation coefficient between daily data and WTI crude oil futures prices reveals that from the beginning of the year to February, WTI was -0.49 against USD/JPY and +0.58 against EUR/USD; while from March to April 7, this relationship changed to +0.79 and -0.63, respectively. In other words, since the Middle East conflict, when oil prices rise, USD/JPY rises (the dollar appreciates and the yen depreciates), and EUR/USD falls (the dollar appreciates, and the euro depreciates), exhibiting this correlated trend. 

 
According to data from the U.S. Commodity Futures Trading Commission (CFTC), which is considered to reflect some speculative fund positions, as of the latest week ending March 31, the net position (long minus short) of the US dollar against eight major currencies (euro, yen, pound, Canadian dollar, Australian dollar, New Zealand dollar, Mexican peso, and Swiss franc) was approximately 77,000 net long contracts. This represents a shift from approximately 225,000 net short contracts in the week ending February 17 this year to approximately 300,000 net long contracts in about a month and a half, consistent with the trend of dollar strengthening following the Middle East conflict. Furthermore, even during the Trump administration's focus on "de-dollarization," there were still approximately 199,000 net long contracts as of the week ending November 25 last year, indicating that speculative funds still had room to further increase their long positions in the dollar. The weakening of the dollar after the ceasefire agreement is expected to be mainly driven by speculative fund liquidation, but significant uncertainties remain surrounding the Middle East situation, such as shipping safety in the Strait of Hormuz and the operation of refineries in Gulf countries. The weakening of the dollar during the ceasefire negotiations is expected to be only a short-term phenomenon, and it will take time for the market to return its focus to economic and monetary policy trends.