The End of Dollar Inverse Correlation

Economics, Premium POM

The Crash of the House of Saud and a New International Energy Alliance

By JC Collins

The role of the US dollar as the main international reserve currency puts it in an inverse relationship with energy commodities and other assets.  This inverse correlation functions as a safe haven method for investors.  When economic uncertainty is high, such as the collapse in crude prices, investors will pull money from crude stocks and put it into the dollar.  In this situation the dollar acts as a safe haven and goes up in value as crude is going down.

The reverse is also true.  In a strengthening environment were crude demand is increasing investors will pull from dollar assets and shift that wealth into crude assets.  This will cause a depreciation of the dollar.  One goes up and one goes down – inverse correlation.

The dollar also holds this inverse correlation with gold and other commodities.  The main thing which supports this inverse correlation is the lack of another reserve alternative.

The Chinese renminbi has been set up as a reserve alternative, as has the SDR of the International Monetary Fund.  But a weakening dollar has not yet come about and created the need for wealth to shift.  In fact the dollar has been strengthening further since the election of Donald Trump.

There are some really interesting aspects to what is happening right now.  Trump wants to increase American energy exports.  These exports would benefit greatly from a weaker dollar, as American energy exports would become more affordable.

But the inverse correlation would have to break like it did during the financial crisis.  The dollar went down and so did energy prices.

Let’s discuss a hypothetical situation.

Imagine Trump wants to renegotiate American debt as he stated during the election campaign.  This could include complex discussions with the IMF to use substitution accounts to exchange USD denominated foreign exchange.  A part of these negotiations would be to adjust the dollar’s exchange rate structure with nations exchanging large amounts of USD for SDR.

This would amount to a devaluation of the dollar.  This would benefit American energy exports but would also cause additional pressure on Saudi Arabia.  How would this work?

Well, Saudi Arabia imports from Europe and elsewhere. Their crude exports would be sold in USD which means the revenue from those exports would be less.  It would also mean that they now have to pay more for imports from Europe to offset the difference.  This would create additional internal social pressure and unrest.

The House of Saud is under increasing pressure both externally and internally.  Without American support, which will now be non-existent under a Trump administration, Saudi Arabia could find itself in a position which is not sustainable.  This will be amplified by the joint Russian-American effort to defeat ISIS, of which Saudi has been the primary supporter.

Outside of another financial crisis, which could be in the works, America will need to purposefully end the USD dollar exchange rate regime.  Action could also be taken by China and the IMF for the same purpose, but considering the level of involvement and integration between the two largest economies on the planet, one the largest creditor and the other the largest debtor, it is likely that the IMF would need to consult and negotiate with both sides.

Either way we are moving towards the end of the inverse correlation between the USD and energy commodities.  This could very well spell the end of OPEC as Russia aligns with America on dominating the world’s energy exports.  This would dramatically shift the alliances in the Middle East and finally release the world from the grip of Islamic terrorism.

A weaker dollar will of course mean a higher cost of imports for American’s.  This would amount to inflation within the domestic economy.  Such inflation would put upward pressure on interest rates, something which is also required in order for the larger monetary system to shift further.

When we start to add all the pieces together, we can see that the odds of interest rate increases and a devaluation of the USD are inevitable and are approaching with increasing speed.  Each of these individual pieces can take up a whole post on its own, but we need to just touch on each and get the info out there.  Most readers will already have a working understanding of the benefit to American exports and GDP with a weakened dollar.  But how that correlates into the geopolitical realm is most fascinating.  – JC