Dollar Will Continue to Strengthen With Softening Global Economy and Continued Weak Demand for Oil

As seen in the accompanying chart, the recent decline in oil prices correlates well with recent surge in the value of the dollar.  The trade weighted dollar index hit a low of 94 in July 2011, and has recently surged to a high of 103 in September 2013, an increase in value of 9.6%.  Over that same period of time, Brent crude spot oil prices hit a peak of $126 per barrel in April, 2012, and have since fallen to a low of $100 in October, 2013, representing a 20.6% decline in cost.  On initial observation, the current directional trend appears to be a continuing strengthening of the dollar and a continued decline in oil prices.

Factors resulting in a general tempering of the global demand for oil exogenous to the US economy include recent tempering of the Chinese economy, a cool down of India's economy, and a  general sluggishness across the globe of what were previously economies exhibiting higher growth rates.

According to the Bureau of Economic Analysis, the US economy grew by 2.8% in 2012.  The Conference Board forecasts a rather tepid growth of 1.5% in the US economy in 2013.  This level of growth is corroborated by a third quarter 2013 survey of 41 forecasters by the Federal Reserve Bank of Philadelphia, with a consensus forecast of 1.5% GDP growth for 2013.

The International Monetary Fund recently reduced its forecast for global growth in 2013 and 2014, pointing out that "Emerging market and developing economy growth rates are now down some three percentage points from 2010 levels, with Brazil, China and India accounting for two thirds of the decline."

These declines in global economic growth rates contribute to a reduced expectation for oil market pressures, and a corresponding reduction in oil prices.  It may just be that these reductions in market pressures for oil are an important contributing factor in the recent run-up in the value of the dollar. With a continued expected sluggishness if not softening of the global economy, we are likely to see continued reduction in oil prices and an increase in the value of the dollar.