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It's been said that currency markets are affected by the price of crude oil. Currencies such as the U.S. Dollar typically react to the rise and fail of the price of this commodity. Why are they linked so closely?

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From an investor's standpoint, if the value of crude oil increases, economies that are oil dependent become more favourable (oil companies will be more profitable). Therefore, investors will find that country's currency more attractive in the foreign exchange market.

  • Oil dependent economies are favored when crude rises? Unlikely since oil is a major cost to most businesses (oil companies being a small fraction of the conomy) – DJClayworth May 19 '11 at 18:59
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    I think he means dependent on the export of oil, like Saudi Arabia. If you're dependent on the import and consumption of oil, then yes, you're in trouble. – user296 Oct 18 '12 at 1:54
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Because we need energy in the form of oil. If more of our money is spent on oil, there is less money to spend on other items especially luxuries like dining out and new cars (ironically)

Since there is less money available, the price of other things shift with it and the whole economy moves. Since less money is available, the value of a single dollar goes up.

Basically, it is because we as a species (let alone nations) are unbelievably dependent on having oil at this point in our existence.

How do currency markets work? What factors are behind why currencies go up or down?

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