OREANDA-NEWS. May 20, 2015. The US dollar has fallen sharply over the past few months following an impressive push upward for nearly a year. This reversal has helped propel crude prices upward and, in turn, petrochemical prices — a relationship that occurs because crude and many other commodities are priced in US dollars. A weaker dollar means you need more of them to buy a barrel of crude, a bushel of wheat or a bag of polyethylene.

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The greenback had been on a run for much of the past year as speculation grew that the US Federal Reserve would raise interest rates soon amid promising economic data. But the dollar has tumbled over the past few months as less-than-stellar US economic data continues to roll in. This raises doubts as to whether the Fed will curb its economic stimulating bond buying program, which would weaken treasuries, pushes up interest rates and hence increase demand for dollars. The dollar remained at four-month lows against a basket of other major currencies on May 14, despite positive economic data.

How does this relate to petrochemicals, and in particular, polyethylene?

Global petrochemical prices, especially feedstocks, are closely tied to upstream crude prices. As a result, a fall, or rise, in crude prices generally results in similar changes to downstream products. Below we can see the relationship between WTI prices and the Platts Global Petrochemical Index over the past year.

The Platts Global Petrochemical Index is calculated based on the individual global product indices with the following weight distribution: 30% ethylene, 20% propylene, 12% benzene, 8% toluene, 7% paraxylene, 11% polyethylene and 12% polypropylene.

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A close watch on the US dollar, and, as a result, the US Federal Reserve’s policy, will continue to give indication to the direction of the crude and petrochemical prices. The market consensus has been for a rate rise in September of this year, the first such rise since December 2008 — the start of the global financial crisis. However, poor economic data could postpone a rate increase and eyes and ears will be glued to the second release of the first quarter GDP and the July 20 release of second quarter GDP.

A stronger dollar means goods imported into the US are relatively cheaper. But the flip side to this is exports into foreign countries are more expensive for the respective country. There are a host of winners in losers in the US dollar exchange rate and it will be interesting to see how an easing of quantitative easing will impact the US dollar’s value and the US import-export landscape.