Oil price shock and the US Dollar – Commerzbank

US President Trump had signalled it, and now it has happened. The US government has joined in on Israel's attacks on Iran and, according to reports, destroyed important nuclear facilities. The dollar would probably appreciate in the wake of an oil price shock, which is now increasingly feared, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

USD might stop climbing up in the near future

"However, this is less due to its status as a safe haven and more to do with the fact that the US terms of trade improve when the oil price rises. Why? Because the US is now one of the world's most important oil suppliers. Or to put it simply: the US economy can afford more imports for the same amount of exports, which become more valuable due to the rise in oil prices. This usually leads to an appreciation of the dollar, which reflects this gain in purchasing power."

"The Fed would respond to the inflationary consequences of an oil price increase with a sufficiently restrictive monetary policy. Strictly speaking, an improvement in the terms of trade leads to a real appreciation of the exchange rate, and this can happen in two ways: either through a nominal appreciation of the exchange rate or through higher inflation. Both lead to US products becoming more expensive compared to foreign products. Which channel is ultimately stronger depends on the central bank that controls inflation."

"In my assumption that the dollar would appreciate, I had therefore assumed that the Fed would keep inflation in check. Anyone who followed the US president's activity on his preferred social media channel on Friday will now suspect that my assumption was perhaps too optimistic and the dollar might not benefit as much as thought"