Federal Reserve Vice Chair Janet Yellen stated in a speech on Saturday that "the evidence available to date suggests that the asset purchases have had only moderate effects on the foreign exchange value of the dollar." As evidenced by the chart above comparing West Texas Intermediate spot prices in both US dollars and Euros; the channel has widened modestly as the US dollar depreciated. While this does point to QEII having had some impact on the US dollar, it also supports Yellen's commentary.
Drilling down into regression analysis however shows a slightly more pronounced influence. Specifically, the variance between actual WTI spot prices and predicted prices (based on a 10 year regression) has doubled since QEII started in early November. On average, our analysis suggests that approximately $9 per barrel of today's total oil price coincides with the most recent changes in the US monetary policy. Specifically, our regression model returns a price for WTI crude that is currently $22 below the actual price. Given that, when oil peaked in 2008, the variance between modeled prices and actual prices were nearly $60 per barrel, we still have ample room for oil prices to rise in a weakening US dollar environment.
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