As reported by CNBC the WTI price of oil slipped by about 1% Thursday morning following the rate hike. What’s the connection? After the Fed rate hike was announced the U.S. dollar “rose to a 14-year high against a basket of other currencies.” A stronger dollar usually leads to lower oil prices because oil is traded internationally in dollars. When the value of the dollar changes, the price in dollars changes independently of the value of the commodity itself. That is, the oil does not have a lower value, but the dollar is worth more. Furthermore, if the dollar is strong in comparison to other currencies, oil becomes more costly in other countries which can have an impact on global demand.
The value of the US dollar is only one factor in the price of oil. There are a variety of other factors that enter into the equation (some macroeconomic, some based on perception and emotions) and, as a result, there is not always a perfect correlation between changes in the value of the US dollar and the price of oil. In addition, as the CNBC article makes clear, whether production decreases as a result of the OPEC and non-OPEC agreements of recent days likely will play a large role in the short term pricing of oil.