Module 10 · Lesson 10 of 12 · Fundamentals and macro · About 5 minutes
The Dollar, Oil and Gold: How Macro Markets Connect
On this page
Before you read: The Yield Curve: Shape, Inversion and What It Reflects
What you will learn
- What the US dollar index measures and why the dollar matters to other markets.
- How oil and gold are often discussed in macro terms, including real yields.
- Why correlations between markets change and should not be treated as rules.
Why does the dollar matter?
If most commodities are priced in dollars, what happens to them when the dollar moves?
The US dollar is the main currency for global trade, commodity pricing and international borrowing. When the dollar strengthens:
- commodities priced in dollars cost more for buyers using other currencies, which can weigh on demand;
- US companies with large overseas sales earn fewer dollars when they convert foreign revenue;
- borrowers outside the United States with dollar debts face higher repayment costs in their own currency.
A weaker dollar tends to work the other way. These are general tendencies, and other forces often outweigh them.
The US dollar index (often shown as DXY) measures the dollar against a basket of six currencies, with the euro the largest weight. Because of that weighting, it largely reflects the euro-dollar exchange rate. Trade-weighted indexes published by the Federal Reserve use a broader set of currencies.
How is oil discussed in macro terms?
Is higher oil a sign of strong demand or a supply shock?
Oil prices affect inflation directly through fuel and indirectly through transport and production costs. In macro commentary, a rise in oil can be described in two quite different ways:
- Demand-driven: a growing economy uses more energy, so prices rise alongside growth.
- Supply-driven: production cuts or disruptions push prices up, which can weigh on growth while adding to inflation.
The same price move can mean different things depending on the cause. The commodity futures lesson covers how crude oil futures work.
How is gold discussed in macro terms?
What does an investor give up by holding a metal that pays no interest?
Gold pays no interest or dividends, so holding it has an opportunity cost. That is why gold is often discussed alongside real yields, which are nominal yields minus expected inflation. In the United States, yields on Treasury Inflation-Protected Securities (TIPS) are a common measure. When real yields fall, the opportunity cost of holding gold falls too, and the reverse when they rise. Gold is also discussed in terms of the dollar, central bank buying, and demand during periods of stress. These links have weakened or reversed at times.
Macro links diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional map linking the dollar, real yields, oil, gold and stocks, with each arrow labeled as a tendency, and a small rolling correlation line that moves from positive to negative over time. It is constructed for teaching and is not real market data.
Try it on a chart
ETFs, not gold, oil or bonds themselves
- Switch between GLD (gold), USO (oil) and TLT (long-term Treasury bonds).
- Compare how each moved over the same period.
Charts and quotes are TradingView's data, not ours, and may be delayed.
Why do correlations change?
If two markets moved together last year, will they move together next year?
Correlation measures how closely two series moved together over a period, on a scale from −1 to +1. It is backward-looking and depends on the period chosen. Relationships among stocks, bonds, the dollar, oil and gold have shifted over the years with inflation, policy and the source of shocks. For example, stocks and bonds have sometimes moved in opposite directions and sometimes fallen together. Treat any relationship as something to observe, not a rule.
What this does not tell you about macro links
- Where the dollar, oil or gold will go next.
- That any relationship will hold in the future.
- How to trade any of these markets.
- Nothing here suggests positioning in any market.
Trademark note. U.S. Dollar Index, Dollar Index and USDX are trademarks of ICE Data Indices, LLC. Used only for identification.
Check yourself
- Which currency has the largest weight in the US dollar index? Hint: one of the world’s two largest currency areas.
- Why might falling real yields matter for gold? Hint: what does holding gold give up?
- A correlation was +0.6 over the past year. Does that mean it will be positive next year? Hint: correlation looks back.
Reflect on your own process
- When you note a relationship between two markets, do you record the period it was measured over and the source?
- What does your written process say about treating a past correlation as a rule, and how would you check whether it still holds?
- Which primary sources would you open to check a headline linking oil prices to inflation?