BNY reports that the long-running positive link between oil prices and the US dollar has weakened. This comes as Brent trades above $70 and WTI tests $68, despite a sharp oil rally since December.
Data from iFlow show mixed US dollar flows, including net dollar selling over the period. The report notes that over most of the past five years, higher oil prices often coincided with a stronger dollar.
Oil Dollar Correlation Weakens
It states that the US produces the most oil and exports some of it, while still using more than it extracts. Previously, this relationship helped explain other unstable market moves, including US dollar gains alongside equity losses.
The report also references geopolitical risk tied to Iran and the Strait of Hormuz. It says the strait is a chokepoint for over 25% of the world’s oil supply, and that recent dollar flows do not appear to be driven by oil.
It adds that a move above $68 per barrel for WTI could affect inflation concerns and fixed income markets. However, it indicates that the oil–dollar linkage is changing.
We must recognize that the traditional link between oil prices and the U.S. dollar is no longer reliable. The 90-day correlation between WTI crude futures and the Dollar Index (DXY) has fallen to just 0.15, a significant drop from the 0.6 levels we saw for much of 2024. This means we can no longer simply buy the dollar as a proxy for rising oil prices.
Geopolitics Drives Oil Not Dollar
This change is largely driven by geopolitical factors, not just U.S. production strength. With WTI currently pushing past $85 a barrel, much of this strength comes from a risk premium tied to recent naval tensions near the Strait of Hormuz. These global security concerns are adding upward pressure on crude without providing corresponding strength to the dollar.
Higher oil is still feeding into inflation, as the latest January 2026 CPI report showed a stubborn 3.4% year-over-year increase, largely fueled by energy costs. However, with the Dollar Index hovering indecisively around 104, it is clear the currency is not benefiting from these inflationary pressures as it might have in the past. This makes traditional inflation hedging more complex.
For our derivatives strategies in the coming weeks, this requires decoupling our energy and currency positions. We should consider using call options on oil ETFs like USO to capture further upside in crude while using separate, targeted forex options to express a view on the dollar. Assuming a dollar rally alongside an oil spike is now a low-probability trade.
Looking back, we saw the beginnings of this divergence throughout the second half of 2025. During that period, a sharp oil rally failed to translate into meaningful dollar gains, even as the market was pricing in a hawkish Fed. This historical pattern confirms that the current market dynamic is not an anomaly but an established trend.
