I know oil is traded in dollars, but I don鈥檛 quite understand why an increase in dollar value lowers oil prices, or a decrease in dollar value raises oil prices.
Assume I am a UK investor and I have a bank account in GBP. In order to buy barrels of oil I will need to exchange these GBP for USD. Clearly, the higher the value of the USD, the more it costs me in GBP to purchase these USD. Therefore, I don't understand how a stronger dollar still lowers the price of oil. Now, obviously, there is something wrong with this logic, but I am unsure where?Why does an increase in value of the US dollar lower the price of oil and vice-versa?
A stronger dollar lowers the price of oil (and all other goods) when priced in dollars. If the dollar strengthens and the pound weakens, the oil would cost more in pounds.
There are some basic economic principles involved in price levels that's a little too lengthy to describe here. Murray Rothbard wrote a couple of good books if you wanted to do in depth study. ';What Has Government Done to Our Money?'; which can be read for free at http://www.mises.org/money.asp and ';Mystery of Banking'; which can be read for free at http://www.mises.org/Books/mysteryofbank鈥?/a>
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