Why oil markets are afraid of currency war?
A currency war is directly affecting demand in the oil market, as a stronger dollar makes oil expensive for other countries, according to a report by Oil Press.
The report added to its owner Nick Cunningham that the currency war also imposes an immediate impact on the pricing for consumers, which explains the reversal of oil prices move towards the dollar.
But the demand for oil is also slowing down because of wider economic problems. Trade war and deteriorating global economic conditions are exacerbating lower prices.
It is no coincidence that the price of crude oil fell by 5% last Wednesday, before reducing its losses after the sudden cuts in interest rates by several central banks, following the devaluation of the Chinese yuan.
On Monday, the Chinese yuan was devalued to the equivalent of seven yuan against the US dollar, angering the US government, which announced that Beijing is manipulating the currency, the latter stopped purchases of agricultural goods in response to this announcement.
Fears of a deeper decline
The threat of a currency war has raised fears of a deeper decline in the global economy, which will obviously be largely negative on oil market demand.
"Not everyone thinks the oil market is in crisis. Commerzbank said in a note that the current market is overstated. Demand is not weak enough to justify the current price."
It is noteworthy that oil prices rose last Friday, supported by a decline in European inventories and production cuts led by OPEC, despite the report of the International Energy Agency, which showed the lowest level of demand growth since the global financial crisis 2008, according to Reuters. However, oil prices remain 20% below their peak this year, recorded in April.
Central banks in India, New Zealand and Thailand have cut interest rates, part of a series of precautionary measures to protect their economies and exports from the fallout from the US-China trade war.
"In fact, cutting interest rates is a clear indication that the battle between Washington and Beijing is a threat to the global economy," he said.
The US Federal Reserve cut interest rates a quarter percentage point for the first time in 11 years.
High US tariffs on China will slow the economy in both countries, but the Chinese government may address the threat by devaluing its currency in a bid to counter the fallout from tariffs.
The Chinese central bank has so far refrained from allowing further devaluation because of the potential risks.
Pressure on emerging markets
The sudden devaluation of the yuan is likely to put enormous pressure on other emerging markets, given the importance of the Chinese economy to the global economic system, and the interdependent nature of the currency market and the close relationship between the dollar and the yuan, which plays a central role in controlling global monetary policy. Other.
With some currencies depreciating, the pressure on other currencies is increasing. The danger is to open the way for a frequent race to allow the currency to fall, eventually leading to a currency war.
The dollar, the world's dominant reserve currency, is a safe haven from liquid assets, so capital tends to take shelter in dollars during crises, and this figure is especially prominent when other currencies depreciate.