Why would we want to talk about oil in terms of dollar strength vs. other currencies? Isn’t oil priced based on supply vs demand and geopolitical risk? Seriously, even though the talking heads want to stress oil as a “weak dollar” play, there’s a host of reasons for oil price speculation, and oil was $20/bbl not too many years ago, so I can’t buy that dollar strength against other currencies is a primary mover of oil – or even a secondary mover. Tertiary at best, IMO. The dollar being worth half as much in exchange would have moved oil from $20 to $40, right? So where’s the other $80 of movement coming from? This is the same issue that goldbugs have with gold, they need to remember that gold and oil are speculative issues and will move for a variety of reasons, even including simple “animal spirits.”

The Fed changes the weights on their Trade-Weighted Dollar Index regularly, based on the latest trade numbers. It’s a dynamic index that always reflects trade weighting, see the Fed’s release on weighting for this data.

That said, doesn’t it make some sense to use the ‘faulty’ USDX in discussions about oil, which is priced in either Dollars or Euros (>50% weighting) and/or against a basket of energy-intensive countries? (EU, JAP, etc.) It does to me, at least prima facie.

Second point: the trade-weighted index is great, but…raises questions. Is this a fixed index like USDX
against “current” major trade partners, or does it dynamically adjust season by season to account for changes in trading percentage over the years. I don’t think our trade with China, for example, was that major a fraction in 1985.

Thanks for your post!

FYI the gist of my argument is that the USDX is worthless for macro prediction, and a broader, trade-weighted index is needed for macro prediction. While your comment is presenting an economic prediction (that I don’t necessarily agree with), it actually bolsters my argument that the USDX is worthless in the predictive sphere of things, by your inclusion of some non-USDX countries in your reasoning.

As long as these countries maintain this policy, the US dollar will not collapse. But if they were to ever decide that the stable currecy relationship with the US dollar was no longer in their interests, then, it could be serious. They currently must feel that it is in their interest to protect the value of their rather large Dollar reserves.

But further recklessness by the Fed, Congress or the President could lead them to change their views. Demanding Yuan revaluation, trade sanctions, or protectionist policies that prevent acquisitions of US companies, are among things to fear.