"US Dollar Strengthens Synchronization with International Oil Prices... Potential for Increased Volatility in Foreign Exchange Market"

Kookgeum Center "Positive Correlation Between Dollar and Oil Prices"

As uncertainty in international oil prices persists, an analysis suggests that the strengthened co-movement between the US dollar and international oil prices could also lead to increased volatility in the global foreign exchange market.

On the 17th, the Korea Center for International Finance stated in its report titled "The Impact of Fluctuations in International Oil Prices on the Foreign Exchange Market and Implications" that "WTI crude oil prices have shown volatility with a fluctuation range of about 20%, rising from the $70 range per barrel in July this year to the $90 range at the end of September, and recently falling back to $75."

Generally, a rise in international oil prices tends to weaken the currencies of net oil-importing countries and strengthen those of net oil-exporting countries. Recently, the US dollar has shown a clear movement as the currency of a net oil-exporting country. Since the US shifted from a net oil-importing to a net oil-exporting country in 2019, the correlation between the US dollar and international oil prices has changed from negative (-) to positive (+).

For currencies of net oil-importing countries, an increase in international oil prices typically exerts downward pressure on currencies such as the euro, yen, and Asian currencies through channels like the current account balance and economic growth.

According to the report, although the euro-dollar exchange rate tended to rise (euro appreciation) during past international oil price increases despite worsening terms of trade, as the US dollar weakened, this trend has shifted to a stronger depreciation trend around the COVID-19 crisis.

In the case of the yen, rising international oil prices increase depreciation pressure on the yen; however, the long-standing low inflation in Japan and the yen’s status as a safe-haven asset have somewhat limited the extent of depreciation.

For major Asian countries, given their significant oil consumption and import dependence, they are more exposed to currency depreciation pressure when international oil prices rise.

Currencies of net oil-exporting countries experience currency appreciation factors through channels such as terms of trade, current account balance, and fiscal conditions when international oil prices rise. However, the Korea Center for International Finance explained that many major net oil-exporting countries adopt exchange rate regimes other than floating exchange rates, making it difficult to clearly identify correlations with exchange rates.

Researcher Kim Seon-kyung of the Korea Center for International Finance said, "In the past, the US dollar played a role in mitigating the impact of international oil price fluctuations on other countries’ economies and exchange rates, but going forward, the strengthened co-movement with international oil prices may instead act to increase volatility."