BNY says the long-running positive link between oil prices and the US dollar is weakening. This is happening even as Brent trades above $70 and WTI tests $68, after a strong oil rally since December.
Data from iFlow show mixed US dollar flows, including net dollar selling during the period. The report notes that for most of the past five years, higher oil prices often came with a stronger dollar.
Oil Dollar Correlation Weakens
The report says the US is the world’s largest oil producer and exports some oil, but still consumes more than it produces. In the past, this relationship helped explain other unusual market moves, such as the dollar rising while equities fell.
It also points to geopolitical risk linked to Iran and the Strait of Hormuz. The report says the strait is a chokepoint for more than 25% of the world’s oil supply, and that recent dollar flows do not appear to be driven by oil.
It adds that if WTI moves above $68 per barrel, it could raise inflation worries and affect fixed income markets. However, it suggests the oil–dollar relationship is shifting.
We should accept that the traditional link between oil prices and the U.S. dollar is no longer dependable. The 90-day correlation between WTI crude futures and the Dollar Index (DXY) has dropped to 0.15, down from around 0.6 for much of 2024. In other words, we can’t simply buy the dollar as an easy way to express a bullish view on oil.
Geopolitics Drives Oil Not Dollar
This shift is being driven mainly by geopolitics, not just by US production strength. With WTI now pushing above $85 a barrel, much of the rally reflects a risk premium tied to recent naval tensions near the Strait of Hormuz. These security risks are lifting crude prices without lifting the dollar.
Higher oil is still adding to inflation. The January 2026 CPI report showed inflation stuck at 3.4% year over year, with energy costs a major driver. But with the Dollar Index hovering around 104, the currency is not gaining from these inflation pressures the way it often did in the past. That makes inflation hedging harder than it used to be.
For derivatives strategies in the coming weeks, this means separating our energy and currency trades. We can consider call options on oil ETFs such as USO to capture more upside in crude, while using separate, targeted FX options to express a view on the dollar. Betting on a dollar rally just because oil spikes is now a low-probability trade.
This split started to show up in the second half of 2025. During that time, a strong oil rally did not lead to meaningful dollar gains, even as markets priced in a hawkish Fed. That history suggests the current move is not a one-off—it is becoming the new pattern.
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