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Oil Prices, US Dollar and Inflation - April 2017

Source: OPEC 5/11/2017, Location: Europe

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The US dollar was mixed in March against both major and emerging market currencies. On average, it declined slightly by 0.1% against the Japanese yen, but losses accelerated toward the end of the month when US dollar interest rates declined. The dollar lost 0.4% against the euro and was relatively flat against the Swiss franc. The dollar advanced against the pound sterling by an average of 1.2%, mainly due to signs of economic deceleration in the UK.

Compared with the Chinese yuan, the US dollar advanced by 0.3% m-o-m on average in March. It decreased by 1.8% m-o-m against the Indian rupee, and is down by 3.0% since the beginning of the year. Compared with the currencies of commodity exporters, the US dollar advanced by 0.8% m-o-m against the Brazilian real, while declining by 0.7% m-o-m against the Russian ruble. Against both currencies, the dollar is down by 6.7% since the beginning of the year.

Against the currencies of NAFTA trading partners, the US dollar lost on average 5.4% against the Mexican peso, thereby reversing during the last two months the majority of the gains experienced since the US election. The peso strengthening continues to reflect both general weaknesses in the US dollar, as well as the impact of interest rate hikes by the Central Bank of Mexico and the continuity of the current trade framework between the two countries. Meanwhile, the US dollar gained 2.1% against its Canadian counterpart currency partly on the impact of lower oil prices.

The US dollar generally strengthened in the first half of the month on expectations of an interest rate hike by the US Fed, which materialized in its 15 March meeting. However, the path of interest rate increases signalled by the Fed median projection of two additional rate hikes in 2017 was lower than the expectation of some market participants. This translated in weakness in the dollar across the board. A further decline in interest rates expectations, and the consequent weakness in the US dollar, occurred in response to the difficulties of the new US administration and the Republican Party to pass health care legislation in the US congress. This was seen as potentially jeopardizing the prospects of growth enhancing legislation in the areas of tax reform and infrastructure spending.

In nominal terms, the price of the OPEC Reference Basket (ORB) decreased by $3.05, or 5.7%, from $53.37/b in February to $50.32/b in March. In real terms, after accounting for inflation and currency fluctuations, the ORB decreased to $35.16/b from $37.37/b (base June 2001=100). Over the same period, the US dollar was stable against the import-weighted modified Geneva I + US dollar basket1 , while inflation advanced also flat.

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