The Us Dollar and the Price of Crude Oil. Business sample

Free EssaysBusinessThe Us Dollar and the Price of Crude Oil
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Abstract

Currency and commodity markets are highly dependent on each other. Fluctuations on one necessarily lead to an increase or a drop in prices on the other. Oil prices particularly strongly impact dynamics of currency exchange rates while not all currencies depend on them equally. The US economy is one of the most volatile economies in the world. The United States consumes a huge amount of oil; that is why, the increase of crude oil prices impacts the rate of the national currency. Besides, the dollar exchange rate largely depends on the fragility of the US economy. The growth of the US government debt can threaten the global economic system.

Relationship between the Appreciation of the US Dollar and the Price of Crude

The size and the level of the national market is an important factor of global influence at the contemporary stage of global development. The high level of the US provision with their own resources relatively restrains the growth of dependence on external sources and gives the US macroeconomic policies a sufficient degree of freedom.

The US dollar as well as any other currency of the world is very sensitive to any events within the country, but special influence on its value is exerted by the state of the US economy and the banking system. The currency exchange rate changes under the influence of many factors. The intensity of the impact of these factors varies. The most noticeable effect on currency exchange rate fluctuations is done by the change in world oil prices (Jackson, 2010). This is due to the fact that the oil consumption is at a very high level in the US. The US is producing oil, but its own resources are insufficient to satisfy industrial needs of such a large country and, that is why, this country is also the largest country in the world by oil import. In the US, the countless number of gasoline, diesel, and other demanded petroleum products is consumed every day. The increase of prices for petroleum products means that the income of the country and US citizens is getting smaller, thereby the dollar exchange rate is falling. Respectively, if growth of oil prices is seen on the world market, then it can be definitely assumed that it will cause a drop of the US currency.

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Thus, from the above mentioned it is clear that the USA is one of the largest consumers and miners of oil. The change of oil prices affects the intrinsic dollar value. In turn, currencies that are in close conjunction with the US currency "look" on the dollar.

The US dollar weakness is the main factor leading to the growth of oil prices. This happens because foreign oil producers see the means to maintain their purchasing power in US dollars in the growth of prices for this asset. However, a weaker dollar is one of the ways to resist influence of high oil prices. Thereby, it is a vicious inflationary cycle.

Oil is a key commodity that determines global economic growth. Therefore, its quotes have a direct influence on the exchange rates dynamics. Since oil is constantly taken into account in global business and trade, it may be assumed with a high probability that everything that concerns its supply or distribution is reflected on the currency market. A decrease of oil price promotes the US dollar exchange rate strengthening and a sharp increase of oil prices can cause the US currency collapse (Krichene, 2008). It is important to mention that strengthening of the US economy has been supporting the US dollar, which will continue to constrain oil price.

The international role of dollar, which remains the main reserve and accounting tool in the world monetary system, contributes to the retention of leading US position in the world economy. Foreign currency reserves of other countries kept by central banks consist of dollars by 61%, approximately 2/3 of calculations in the world trade undertaken are in US. Dollar is a measure of value of many important commodities (such as oil) on the world market. In US dollars, 3/4 of international bank lending is carried out (Carbaugh, 2008). The role of US dollar is much greater than the US economic share in the world.

The United States derives revenue from issuance and emission of banknotes. Dollar money stock reaches a huge value of 560 billion. More than 2/3 of this stock rotates out of the American economy, mainly in the Russian Federation. It means an actual loan to the US Treasury.

Dollar serves as a single standard to which all currencies of developed countries are pegged. In practice, all participants of the International Settlements continue to be guided by dollar. The cause of this is the need of international exchange to have a unified universal means of payment, which is dictated by the growing unity of commodity production in the world economy. Only national currency of the country, which has a leading role in the world economy, can effectively satisfy this need in the existing conditions and the United States meets these requirements.

The dollar exchange rate changes may result in profound consequences for the US and other countries. Increase of its rate reduces the amount of export earnings in dollars, which frequently entails a more significant fall of world prices, particularly for raw materials, compared to the change in the exchange rate. In contrast, weakening of the dollar rate serves as a powerful means of contributing to the growth of US exports and marginalization of US competitors on foreign markets. At the same time, imports are constrained into the US due to the effect of rising prices. Thus, in any way the US dollar exchange rate changes can bring benefits and advantages.

It is also worth considering impact of dollar exchange rate and oil prices on the Russian economy. Russian currency depends on fluctuations in oil prices. In contrast to the US where everything is connected with a large consumption, everything is more complicated in Russia. Russia not only has a huge market of petroleum products consumption, but also is a country that produces and supplies oil to world markets. In fact, in many respects the country lives at the expense of oil and dollars. Therefore, increase of oil prices provides support to the ruble exchange rate.

Price changes have a very strong impact on the country’s economy. The dollar exchange rate determines prices for food and consumer products and this is stipulated by the fact that all products are bound to the price of oil. Today, a half of Russian budget is comprised of oil and gas revenues so that any drop in prices could have implications. In recent years, Russia's economy has become increasingly dependent on oil exports and Russia will lose 2.1 billion dollars of budget revenues during a year with a decrease in oil prices by one dollar.

Thus, the dollar exchange rate and oil prices govern currencies of other countries since all world currencies depend on the dollar exchange rate in varying degrees, which in turn affects the oil price.

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