Should the U.S. pull out of the Iran accord and the price of crude spike higher, things could be very different for the dollar this time around. A rally toward $80 per barrel would boost the U.S. currency versus most of its peers — contrary to what usually occurs when crude prices increase, according to Deutsche Bank AG strategist Alan Ruskin. That’s because an Iran-fueled rally would be a supply-side shock, a clear negative for risk assets versus the greenback.
“In the event of the re-imposition of U.S. sanctions, the lack of a substantial or immediate supply response from either the U.S. or Saudi Arabia means that little will stand in the way of crude oil prices approaching the $80/bbl mark,” Ruskin wrote in a note. “The market is taking on board a view that the U.S. will have a large fiscal-inspired demand-side shock that will more than offset any negative oil supply-side shock, unlike much of the rest of the world, and the demand and supply side will provide a double whammy for U.S. inflation.”

Rising oil prices of late have been the product of favorable demand dynamics, a harbinger of improving growth and therefore a positive for higher-beta currencies. A supply-side shock would have the opposite affect, while also pushing Treasury yields upward amid rising inflation pressures, further boosting the greenback, Ruskin said.
WTI was trading around $67.62 per barrel Tuesday, while the Bloomberg Dollar Spot Index was up 0.4%, touching its highest since January. Ruskin also recommends shorting the Australian or New Zealand dollars versus the U.S. currency “in part because oil price hikes would likely have a negative correlation with most other commodity prices.”
Sources and photo-credits: Bloomberg