Analysis: U.S. Dollar Weakness a Boon to Fuel Exports


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Oil prices rallied this week as a sell-off in the U.S. 
dollar boosted commodity prices, with some of the largest holders of U.S. 
treasuries and equities reducing their exposure to U.S. assets. With more 
dollar weakness forecast hereon, the U.S. crude refining sector looks poised to 
benefit in more ways than one.

   The dollar's tumble came as European Union (EU) allies -- some of the 
largest holders of U.S. bonds - last week announced investment diversification 
plans to lessen their entanglement with the U.S. economy, following repeated 
threats by U.S. President Donald Trump to annex Greenland.

   While Trump last week ruled out military options, renewed tariff threats on 
Canada, France and other trading partners added to uncertainty and to Europe's 
resolve to diversify away from the United States.  On Tuesday, the European 
Union announced a free trade agreement with India, which aims to double EU 
goods exports by 2032 and reduce tariffs by more than 96%.

   Even if the dollar were to get some near-term relief, it will find it hard 
to escape the pressure of the systemic downsizing of U.S. currency reserves 
held by global central banks. From 2022 to 2024, central banks swapped their 
dollars reserves for over 1,000 tons of gold annually, the World Gold Council 
said. However, purchases declined to 850 tons in 2025 and are expected to 
decline this year. 

   Surging U.S. bond yields and the potential for European reprisal against 
U.S. tariffs have also been weighing on the dollar.  

   The yield on the 10-year U.S. Treasury note hit a five-month high of 4.315 
earlier this month and hovered at 4.27 this week. The EU has proposed tariffs 
on 93 billion euros, or $108 billion, worth of U.S. goods, and could consider 
the "fire-sale" of $8 trillion in U.S. Treasury holdings that could crash the 
dollar.

   Oil prices and the dollar have a decades-long history of a strong inverse 
correlation. A softer dollar typically means higher oil prices, while a 
stronger dollar has the opposite effect.

   However, this long-standing relationship started to break down in early 
2021. The currency value effect was overshadowed by the rebound in crude prices 
from pandemic lows as demand recovered, while the dollar strengthened on the 
back of a restrained U.S. fiscal and monetary response. Over the following four 
years, the dollar index and crude oil futures traded in tandem, challenging 
decades of conventional wisdom.

   The inverse correlation reappeared, albeit much murkier, in the spring of 
2025 as the dollar slipped in reaction to trade-punitive U.S. tariffs.

   Over the past week, crude prices rallied amid the U.S. dollar plunging to a 
four-year low, but the timing of these events does not necessarily indicate a 
return to normal.

   Good news for net exporters

   The geopolitical risk premium tied to oil has ballooned in wake of protests 
in Iran and the fear of possible U.S. military strikes on the country producing 
3.2 million bpd, situated in a region responsible for around a third of global 
oil supply.

   Looking forward, U.S. refiners may still benefit from a weaker dollar in 
multiple ways. Higher crude prices typically mean stronger refining margins, 
and a softening currency makes U.S. products more attractive to international 
buyers. This is generally good news for net exporters -- last year, total U.S. 
oil and product exports surpassed imports by 2.27 million bpd last year, 
according to Energy Information Administration data.

   Fuel inventories appear ample into the start of 2026, with domestic refiners 
maximizing operations and delaying non-essential maintenance to exploit 
refining margins that are up more than 60% year-on-year. With a softer dollar 
and clean tanker rates that are down 38% on the year, U.S. fuels may regain a 
competitive edge on the global market.




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