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Oil Prices, US Dollar and Inflation - March 2017

Source: OPEC 3/16/2017, Location: Europe

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The US dollar declined for the second consecutive month in February against both major and emerging market currencies. On average, the US dollar declined by 1.5% against the Japanese yen – down 2.4% since December. The dollar lost slightly 0.2% against the euro and 0.6% against the Swiss franc. The dollar declined against the British pound sterling by an average of 1.1% on signs of some economic deceleration and uncertainties regarding the Brexit discussion in parliament, as well as calls by government officials from Scotland to hold a second independence referendum.

Compared with the Chinese yuan, the US dollar dropped by 0.3% m-o-m on average in February, its second decline this year. It decreased by 1.5% m-o-m against the Indian rupee. Compared with the currencies of commodity exporters, US dollar declines have been more accentuated. The dollar decreased by 2.9% m-o-m against the Brazilian real – down by 7.4% since December – and by 2.4% against the Russian ruble – down by 5.9% since December.

Against the currencies of NAFTA trading partners, the US dollar on average lost by 4.6% against the Mexican peso undoing its January gains. But it is still 7.5% higher on average than in October. The peso strengthening mainly reflects the friendlier tone of US officials regarding trade relations with Mexico. Meanwhile, the US dollar decreased by 0.6% against the Canadian dollar.

The decline in the value of the US dollar for the second consecutive month in February mainly reflected market expectations of a slower path of interest rate increases by the Fed during the month. However, at the end of February and the beginning of March, speeches by Fed officials have translated into market participants looking with greater likelihood at an interest rate hike at the upcoming March meeting, which has strengthened the currency. Fed chairwoman Janet Yellen said at the beginning of March that during the next Fed meeting, the FOMC “will evaluate whether employment and inflation are continuing to evolve in line with expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”.

In nominal terms, the price of the OPEC Reference Basket (ORB) increased by 97¢, or 1.9%, from $52.40/b in January to $53.37/b in February. In real terms, after accounting for inflation and currency fluctuations, the ORB increased to $37.37/b in February from $36.90/b in January (base June 2001=100). Over the same period, the US dollar declined by 0.5% against the import-weighted modified Geneva I + US dollar basket 1 , while inflation advanced by 0.1%.

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