Why there is a negative for the Dollar higher oil

I wrote my own piece on how oil prices Impact of Dollar American, but Member Jens Nordvig of Nomura has a take also detailed that is worth reading:

What is the soaring prices of oil for the dollar?

Recent memories suggest that high oil prices are bad news for the dollar. First of all we were used to a generally negative correlation between oil prices and the dollar since around 2004. Was particularly the case in the first part of 2008, when the correlation between EUR/USD and Brent reached high levels. Second, old episodes of tensions in the Middle East, suggest that the dollar tends to weaken when there is oil supply shocks. This was the case during the first war of Iraq in 1991 and in the run up to war in Iraq in 2003.

Than the observed correlations there also fundamental reasons to explain why the dollar could be negatively correlated with the price of oil. We can think of three:

1. High energy intensity of U.S.: U.S. economy is more energy intensive than most other developed market economies. Related to this, the United States are a largest importer of oil, the euro area. This means even once the United States terms of trade deteriorate more than other economies when oil prices are going higher.

2 Flow petrodollar: when oil prices rise, oil-exporting countries generate more revenue. If a significant proportion of the additional revenue is allocated currency non-dollar net impact may be selling USD. In 2008, when oil prices rose above $ 100 a barrel for the first time, we saw a strong correlation between the price of EUR/USD and oil (Figure 2). This correlation is compatible with an increasing share of the euro in the reserves of countries such as the Russia and the Middle East oil exporters.

3 Asymmetry in inflation targets: oil shocks affecting monetary policy differently in different countries. The Fed has tended to focus on core inflation (Greenspan used to concentrate on core déflateur PCE for example). This means that high oil prices aren't a concern of monetary policy. On the other hand, the ECB focuses on headline inflation and we observed in the past that the upward pressure of headline inflation in the world price of energy (as in mid-2008) as potential rate increases. This asymmetry in inflation targets creates biased low USD to oil price shocks, at least at EUR/USD.

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