Dollar Index strength may tumble oil prices in 2011

26 November 2010 26 November 2010

BonTrade

The Dollar Index’s recent strength could be a turning point that may see oil prices tumble lower and the ICE Dollar Index adding another five percent by April 2011, according to Bank of Tokyo Mitsubishi UFJ, citing trading patterns.

Dollar Index Strength Continues

The Dollar Index, which tracks the US dollar against six major world currencies rose above 80 yesterday after reaching lows of 75.631 on 4th November, the weakest since December 2009.

The new two month index high reached in trading this morning is being helped by worries about eurozone debt problems and North Korea’s fresh warning against a US South Korean joint military exercises.

Technical Dollar Trading Patterns

“The Dollar Index is heading into a major turning point. If the five day line consistently stays above the 90 day line, and the 65 day and 90 day lines turn upward, the dollar weakening trend will come to a close, and we’ll have entered a sustained strong dollar phase.” said Teppei Ino, an analyst at the unit of Japan’s largest bank.

Oil prices have fallen around seven percent after reaching 2010 highs on 11th November.

Dollar denominated futures contracts including the crude oil contracts of Brent and WTI tend to attract buyers using foreign currencies when the US dollar looses value, as the contracts appear cheaper to buy, however the reverse affect is also true.

Meanwhile, China’s yuan closed down against the dollar today as traders reported banks and their clients built long positions in US dollars to bet on a continued near term rise in the dollar in global markets.

“The recent PBOC mid-points show they are related to the dollar index’s movements, encouraging investors to bet on the index’s direction. Some of our major corporate clients also long dollars today.” said a dealer at a Chinese bank in Shenzhen.