High Oil prices to support the US Dollar – Commerzbank
Economists at Commerzbank explain why the US Dollar should benefit from high Oil prices ceteris paribus.
FX market is the only channel through which relative prices between US and European goods can be balanced
If the Oil price rises, US goods will on average become more valuable on the world market, whereas the goods produced by others, for example by Europe, are becoming less valuable by comparison.
Prices can adjust via a number of mechanisms: Either the Euro prices for European goods fall. That is not the case at present. On the contrary. Inflation in Europe is high. Or the Dollar prices for US goods rise particularly significantly. We do not observe that at present either. The Fed has already reduced US inflation notably.
The only channel through which relative prices between US goods and European goods can therefore be balanced is via the FX market. If the US Dollar appreciates against the Euro, energy-intensive US goods become more expensive compared with low-energy European goods.
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