Are high oil prices good for the dollar? Short-term, a rise in the crude price can be positive for the greenback, since all importing countries must purchase dollars to pay for oil. The longer-term impact will be determined by the investment behaviour of exporting nations.
Today’s quarterly review from the Bank for International Settlements suggests that, in this most recent oil price cycle, petrodollars have been invested more broadly across assets and countries. Since 1999 members of the Organisation of the Petroleum Exporting Countries have channelled a smaller proportion of their investable funds into US securities than in the 1978-82 cycle.
Since September 11, hunger for dollar assets may have diminished for political reasons and because of the regulatory requirements of the US Patriot Act. The BIS survey, however, suggests that expected returns have become increasingly important. Opec has diversified out of US Treasuries into other US American assets. The currency composition of its bank deposits has become more sensitive to changes in interest rate differentials between the euro and the dollar.
Meanwhile, the domestic equity and real estate markets in the Middle East have absorbed part of the extra oil revenues. The rise in stock prices this year has been meteoric – the Dubai market, for example, has gained 166 per cent. Valuations are at bubble levels but, as yet, there is little sign of waning investor appetite.
The portfolio preferences of Middle East investors are one aspect of a shift in the growth of current account surpluses away from Asian oil importers towards oil exporters. This takes savings away from areas with a track record of currency intervention and a very strong dollar bias – Japan holds about 90 per cent of its reserves in dollars – towards areas with a more diversified approach to asset allocation. Inevitably, US assets will attract part of these savings, but it will be a smaller share than in the past. This suggests that the long-term impact of rising oil prices on the dollar is negative.