Oil is the backbone of some of the world’s most prominent economies due to its substantial trading volume, thus it strongly affects just about every area of economics and finance across the globe, including currency prices.
Hence, forex traders and the like must understand this correlation to better anticipate currency values.
Oil-Producing Economies and Currency Prices
Changes in the oil markets impact almost every national currency every day.
In fact, nowhere is this most apparent than in major oil-producing nations whose economies are dependent on increased oil prices. Consequently, a slump in oil prices can significantly devalue the country’s currency.
On the other hand, when oil prices spike, these nations experience a surge in their currency value.
Hence, in forex markets, traders should note that the value of currency pairs is based on the economic status of the two countries.
Oil and the U.S. Dollar
The largest producer and exporter of oil in the world is the U.S., which means its currency worth is also impacted by global oil prices. However, oil is not the country’s main export; therefore, its economy is not as susceptible as nations whose net export is oil.
Additionally, crude oil is quoted in USD, which means, no matter where it is purchased in the world, it is basically paid for in US dollars. Thus, the price of oil is inversely tied to the value of the USD.
This means, when the USD value decreases, it takes more US dollars to pay for a barrel of oil and vice versa.
Development of Oil Correlations
The development of oil correlations began around the mid-1900s when the energy markets reached a historic high, prompting many nations to leverage their crude oil reserves to build their infrastructures.
However, soon after, an economic collapse occurred, forcing some countries to borrow even more against their oil reserves to help restore their economic standing.
Growth rates remained high for some time before, eventually, crude oil prices plummeted, causing a recession in less-energy rich countries.
Pressure to sell soon spread to other commodity markets, sparking anticipation of global deflation, which further strengthened the link between affected commodities, including crude oil and nations with sparse reserves.
U.S. Dollar (USD) Impact
As the US continues to increase its production of oil, the US dollar has remained pretty stable despite the steep decline of crude oil because of the country’s strong economic growth following the falling market as compared to other nations.
The US’s great economic diversity also keeps it from being too reliant on the oil industry, despite the fact it significantly contributes to US GDP, which, too, helps keep the U.S. dollar strong.
Results of Over-Dependence
In a nutshell, over-dependence puts nations that depend more heavily on crude oil exports at risk of greater economic damage during declining markets.
Now that you better understand how to read currency values, you can approach the forex markets with greater confidence.
In the meantime, to compare currency prices, including USD to PHP, check out the currency converter provided on the Western Union website.
