If the U.S. dollar continues to weaken, it could help strengthen crude oil prices, which are still faced with global oversupply, a lack of growth in China and uncertainty surrounding OPEC's potential cuts to supply.
A declining dollar could help turn around oil prices, because the vast majority of oil trading occurs with U.S. dollars and during the past ten years, for every 1% the dollar fell, oil rose almost 4.5%, said Jodie Gunzberg, global head of commodities and real assets at New York-based S&P Dow Jones Indices.
The strength of the U.S. dollar is not the sole cause of all declining commodity prices, because during the past decade, there has been a weak correlation (just -0.60) between the two factors.
"More importantly, when the dollar rose year-over year, it increased on average 8.1% driving commodities down 7.0% on average," she said. "While some economically sensitive commodities are moved more by the rising dollar, especially in energy, many are less sensitive and some even rise with a rising dollar."
Another factor which can skew the returns is that when the dollar rises in value, investors could be taking advantage of cheaper commodities. The increase in volume could push prices down even more.
"On average, for every 1% the dollar rose, commodities on average fell 0.872%," Gunzberg said.
Oil is impacted even more when the dollar increase in value, bringing down Brent crude by 3.67% and West Texas Intermediate (WTI) crude oil by 4.0%.
When the dollar is a declining environment, it dips by 6.5% year-over-year and as a result commodities rose by an average of 25.5%. For every 1% the dollar fell, commodities on average rose by 3.932%.
"The falling dollar is 4.5 times more powerful than the rising one on commodities," she said. "Every single commodity benefits from the falling dollar, with the metals gaining most."
Over longer periods, the correlation is even weaker and nearly non-existent, said Edison Byzyka, chief investment officer of Hefty Wealth Partners in Auburn, Ind. The five-year average correlation stands at -0.20 while the ten-year average correlation stands at -0.30.
"There is no evidence of strong positive, or negative correlation between the two assets when we look at long economic cycles," he said.
A stronger negative correlation often emerges and is magnified during times of economic distress and pressure. In late 2008, the U.S. dollar was stronger and the correlation between oil and the dollar dropped to near -0.80, Byzyka said.
The correlation between the significantly stronger U.S. dollar and oil has been extremely volatile since 2015, and the figures have ranged from -.60 to 0.35.
"It's likely the case that the strength of the U.S. dollar may have incentivized further production in hopes of higher profits," he said.
If interest rates rise, the yield of the U.S. currency may be "favored across carry trade transactions by global investors," Byzyka said.
"This may cause oil trading to become a demand issue and not supply," he said. "Emerging markets will now have to deal in stronger dollars, so to speak, which may be an issue for oil prices."
The oversupply of oil is the largest factor affecting oil prices currently, Gunzberg said. Until OPEC makes a formal announcement, any potential supply cuts are unknown and remain mere speculation. Even if OPEC does cut production, since Iraq will not cooperate and many key countries such as Iran, Libya and Nigeria are being excluded, a decline may not help prices since Russia has expanded production.
Oil demand is increasing as reported by the IEA and if the weather turns colder this winter, oil prices could rise. However, oil prices face other challenges such as China's energy plans.
"China may increase buying short-term before oil price rises more and then once the oil prices rise, they may use their own reserves or start exporting, making a long-term recovery for the global market more challenging," she said.