The falling crude prices have turned good for some while it has not been so for other countries whose currency is pegged to US dollar. Since November last year, when the Opec cartel began to fight for a bigger share of the market, Brent crude oil has fallen more than 40 per cent. Copper, nickel and other commodities have followed suit, hurt by a slowdown in China but also oil’s magnetic pull on the sector. Some of the world’s biggest oil and commodity exporters and the impact on currencies versus the US dollar is clear - Russia’s rouble is down 30 per cent over the same period, Norway by 12.6 per cent, Canada by 15.5 per cent.
But the blow of lower oil revenues for some is cushioned by commodities largely being priced in US dollars, a currency that has strengthened notably over the past 16 months. Look at Russia, the dominant oil exporter outside Opec. While the rouble has rallied recently, over the year it has fallen far enough to benefit its country’s oil producers, since they pay for oil production in roubles, but receive revenues in dollars.
That is how the Putin government wants it. Not so fortunate, however, are oil producers whose currencies are pegged to the dollar, including many Opec members. RBC Capital Markets points out that Saudi Arabia's new leadership has had to draw down on its reserves and resort to borrowing to pay for high levels of social spending. FX reserves are down from $746bn in August 2014 to $647bn in September 2015. While Saudi Arabia has led the group’s policy of intensifying output to fight competition from higher-cost rivals, such as US shale producers, it can argue that it has been one of the hardest hit by the double whammy of keeping its currency pegged to the dollar during the oil rout.
Impact on Indian economy
Since the oil imports in India are increasing, this pushes up the demand for dollar which strengthens the dollar against rupee. This depreciates the value of the Indian rupee and erodes purchasing power of Indian currency in the international market. US dollar is the currency of international trade, so for all practical purpose all buy and sales on international level is defined in terms of USD. Now, if USD strengthens, it will mean one dollar should be able to buy more than what it earlier bought - which means that what is locally priced at 200 Dirham should now be available at say 45 USD. Thus the price of crude goes down. This is the relation dollar value and crude oil share - one strengthens other weakens.
Also, US is the biggest importer of crude oil. So when crude price go up, it means US will be shelling out more dollars to buy it, which means more dollars are going out of the country and hence the dollar will weaken. Same would be true other way round. But this is when we look at it in isolation. US is also one of the biggest oil producers - so when oil price will go up, its own oil revenue will also go up - this impact might counter the fall in dollar a little but not significantly because it is a net importer.
But then there is another factor which comes in play. If oil price goes up, it is up for rest of the world also. They trade oil in dollars, so now they will need to spend more dollars to buy oil - thus demand of dollars go up in international market. This will again counter the fall of dollar because of increasing oil price.
