Barclays Warns High Oil Prices May Now Weigh on US Dollar
Surging oil prices, once a key driver behind the strength of the US dollar, are beginning to exert the opposite effect. Analysts at Barclays found that evolving dynamics in the energy market could increasingly weigh on the currency.
In the early phase of the Iran conflict, crude oil prices and the US dollar generally moved in tandem. Escalation of tensions pushed both up, while signals of peace weakened them. However, that relationship has started to shift in recent weeks.
Brent crude oil prices remain elevated, holding in the $90-$100 per barrel range. In contrast, the US Dollar Index (DXY) has retreated toward levels seen prior to the outbreak of the conflict, signaling a decoupling between energy markets and the greenback.
Changing Market Dynamics
In its latest research note, Barclays revealed that emerging signs of a new geopolitical stability in the Middle East have altered the role of energy prices in currency markets. Whereas higher oil prices previously acted as a supportive catalyst for the dollar, they may now function as a drag.
The bank also observed that since early April, every 10% decline in oil prices has been followed by roughly a 1% drop in the dollar index, underscoring the currency's growing sensitivity to energy price movements.
According to Barclays, this behavioral shift likely reflects several underlying factors. One is the crowded long positioning in the US dollar, as indicated by market sentiment indicators. Additionally, foreign exchange participants are increasingly anticipating a normalization in energy prices over time. Another contributing factor is the rising risk premium attached to holding US assets, which has begun to erode confidence in the greenback.
Given these conditions, Barclays predicts that pressure on the US dollar will continue in the short term. The potential for geopolitical stabilization and a shift in market focus to domestic issues in the United States—including the change of central bank chair—could further limit the currency's upside.
Concerns also arise from the impact of high oil prices on the US economy. Analysts at Goldman Sachs estimate that prolonged spikes in energy prices could reduce around 10,000 jobs per month and push the unemployment rate to 4.6% by the end of the year.