Can the weak dollar be blamed for high oil prices?
Asserting that the “weak dollar” is a significant reason behind the rise in oil prices has become as ritualistic as asserting that “China and India” are the cause. And yet, the forces which determine the foreign exchange value of the dollar against the euro, the yen, or the pound are distinctively different from those that determine the price of oil. There is, however, one logical argument which can sometimes provide a sufficient explanation as to why a depreciating dollar and increasing oil prices are inversely related – If the dollar weakens against the euro, the ability of the oil-exporting countries to buy European goods will decline because their oil exports are denominated in dollars. The Europeans, at the same time, will be able to pay the higher dollar prices of oil because the euro has appreciated. Clearly, to keep their purchasing power over European goods constant, the oil-exporting countries need an increase in oil price approximately equal to the depreciation of the dollar
