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Guest Commentary: Why Oil May Fuel a Stronger US Dollar

Guest Commentary: Why Oil May Fuel a Stronger US Dollar

Yohay Elam, Technical Strategist

Although the US is still far from being energy independent, reliance on imported oil is clearly weakening, a trend that could present positive implications for the US dollar in 2013.

Trade figures for December show that the US economy had a petroleum trade deficit of $18.7 billion, the lowest since 2009, when the recovery had just begun. The more impressive figure comes from imports of oil barrels: only 223 million barrels of crude oil were imported to the US, the lowest since February 1997.

These numbers could point to lower consumption due to better fuel efficiency: 33.8 miles per gallon (mpg) in 2012, as compared to 29 mpg in 2011. Yet they are also based on better production. Oil output jumped by 766K barrels a day to the strongest level in 15 years.

The increase in oil production has an immediate impact on the trade balance for oil. Less crude is imported and more oil products are exported, which is positive for the dollar. In addition, a better trade balance also impacts gross domestic product (GDP), which impacts the dollar as well.

There are also some longer-term implications. Domestically produced oil is cheaper and can be used to fuel manufacturing. Cheaper costs in the US, combined with higher wages in China, contribute to the re-shoring process that has begun.

The short- and long-term effects are amplified by the psychological effect. Each month of higher oil production could increase the positive image for the US economy and increase capital flow into the US.

Needless to say, this is not the sole factor moving the US economy or the dollar, but this significant change in energy supply is already underway, and it has undeniable implications on the US dollar. (For further analysis about events moving the currency markets, see the forex weekly outlook on Forex Crunch.)

By Yohay Elam of Forex Crunch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.