Oil price turbulence rattles global economy
- By Dan Steinbock
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E-mail Shanghai Daily, August 5, 2015
Inverse relationship
The US dollar and oil have an inverse relationship. When the value of the dollar goes up, oil price tends to come down. Conversely, when dollar falls, oil tends to go up.
In the course of the past year, expectations of rate hikes have pushed the dollar up, while Europe's crises have caused the euro to fall and oil prices have plunged. As a result, the US dollar index, which measures the value of the greenback relative to a basket of foreign currencies, has soared from 82 in August 2014 to 97 today.
Currently, markets are holding their breath.
In addition to the US dollar and the Fed's impending decisions, oil prices have been impacted by persistent oversupply fears, which emerged as a result of the US shale revolution. Looking ahead, the nuclear deal with Iran is likely to result in Tehran's increased oil exports.
At the same time, the international currency environment is about to change as China and the IMF are working to make the renminbi a reserve currency, possibly by October, when the IMF will hold its vote on the issue.
The Fed's impending rate hike will prove challenging to emerging markets, particularly those economies (such as Nigeria and Colombia, among others) in which growth or trade rely on oil revenues.
In contrast, China's economy is larger, more diversified and not reliant on oil exports.
The good news is that plunging oil prices support Chinese economic reforms and thus the rebalancing from investment and exports to consumption and innovation. However, turbulence will increase once the Fed will begin to hike interest rates. That's when the real rollercoaster ride will begin.
Dan Steinbock is the research director of international business at the India, China and America Institute (USA) a visiting fellow at the Shanghai Institutes for International Studies (China) and at EU Center (Singapore). For more, see http://www.differencegroup.net
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