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EIA: currency appreciation makes crude oil less expensive for some oil importers

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World Pipelines,

Brent crude oil prices and the index of the value of the US dollar have generally been moving in opposite directions on a daily basis during the past several months. The two measures are responding to similar economic information – in this case, the outlook for global economic growth and demand expectations. Much of the decline in the US dollar index can be attributed to appreciation in the euro against the US dollar.

In general, a depreciation of the US dollar index with other currencies reflects differences in market participants’ expectations of economic growth in the United States compared with other countries. The US dollar index measures the value of the US dollar against six currencies' exchange rates: the euro, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krona. The euro represents more than half (58%) of the currency weighting in this index.

A decrease in the index means the dollar is depreciating against this group of currencies. The US dollar index declined to 92.8 on 6 August, the lowest level in more than two years. This level marks a decline from late March 2020, when the index had increased to 102.8. This change was primarily driven by an appreciation of the euro against the US dollar, and it suggests economic growth expectations are increasing in Eurozone countries, supported by a combination of the €750 billion fiscal stimulus package, European Central Bank monetary policy support, and slowing growth in COVID-19 cases.

Because Brent crude oil is priced in US dollars, a depreciation in the US dollar also makes crude oil imports relatively less expensive for countries that use the euro, which is especially relevant because many Eurozone countries are net crude oil importers. From 1 June to 12 August, Brent crude oil prices increased 19% in US dollars but only 12% in euros as a result of the euro’s appreciation against the US dollar.

Although much of the US dollar index’s recent decline has been relative to the euro’s appreciation, other currencies have also been appreciating against the U.S. dollar since early June. From 1 June to 12 August, the currencies of the United Kingdom (pound sterling), Japan (yen), China (renminbi), and India (rupee) all appreciated against the US dollar by between 1% and 5%.

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