Dollar-Oil Correlation Falls to Multi-Month Low; ING Says Fed Hold Could Weigh on Dollar

The U.S. dollar could come under renewed pressure and become more closely aligned with lower oil prices if the Federal Reserve leaves interest rates unchanged, according to ING strategist Francesco Pesole. The Bloomberg Dollar Spot Index was down less than 0.1% on Wednesday, marking a fourth consecutive session of limited movement despite notable volatility in oil prices.

Dollar-Oil Relationship Weakens

The 60-day rolling correlation between the Bloomberg Dollar Spot Index and Brent crude futures has fallen to its lowest level since late March. Historically, the two assets have tended to move more closely together during periods of heightened geopolitical uncertainty, although that relationship has weakened in recent sessions.

Pesole said a decision by the Federal Reserve to leave rates unchanged could prompt some investors to reduce precautionary long-dollar positions, potentially allowing the dollar to become more responsive to movements in oil prices. He suggested the dollar's recent resilience may partly reflect interest-rate expectations rather than underlying economic fundamentals.

Market Positioning Remains Bullish

According to Commodity Futures Trading Commission (CFTC) data, speculative bullish positioning in the U.S. dollar has climbed to its highest level since 2015. The increase followed the U.S. strike on Iran, which raised concerns over global energy supplies, supported oil prices, and fueled inflation expectations. Oil prices have continued to fluctuate alongside developments in the regional conflict.

Meanwhile, financial markets are currently pricing in a Federal Reserve rate increase at the September policy meeting.

Market Focus

If the historical relationship between the dollar and oil prices strengthens again following a Fed decision to keep rates unchanged, some long-dollar positions could be reassessed. Market participants may monitor the Bloomberg Dollar Spot Index after the Fed announcement for indications of whether the correlation begins to normalize.

Sources: ING (Francesco Pesole); Commodity Futures Trading Commission (CFTC); Bloomberg Dollar Spot Index.