Oil Prices Impact on Currency Rates and Economy

Tim Clayton
Last Edited Aug 01, 2018

Changes in oil prices are a vital component for the global economy given the impact on both growth and inflation. There are also clear winners and losers in terms of economic impact which can lead to important currency-market opportunities, especially given cyclical elements in both oil prices and major economies.

In this article, we will help you understand how the oil prices impact all currencies and all economies in the world (to a varying degree, of course). Like all other components of the economy, oil prices are difficult to predict and difficult to amount their precise impact, but learning the basics can help one make better decisions in when transferring foreign currency abroad.

Major oil-importing economies damaged by higher oil prices?

The major global economies overall are substantial net importers of crude. When oil prices move higher, there is a net decline in purchasing power within the largest economies. At the retail level, fuel prices increase which has a direct negative impact as increased spending on energy triggers weaker discretionary spending.  

Higher energy prices also lead to caution over investment given uncertainty surrounding the outlook. There is, therefore, a negative impact on growth within the global economy.

In contrast, a decline in oil prices will boost net consumer spending and support overall GDP growth.

Current Oil Prices:

Inflation implications are substantial

As well as growth, changes in oil prices have an important impact on inflation. Energy prices have a substantial weighting in consumer prices indices given the importance for consumer spending and shifts in energy costs will have a direct impact on headline inflation.

There are also important secondary effects as higher energy prices trigger upward pressure on costs within the industrial and transport sectors.

In this environment, there is the risk that an inflationary spiral develops as cost increases are passed on to the consumer sector. Higher headline inflation also tends to put upward pressure on wage settlements and inflation expectations which can reinforce upward pressure on prices.

Summary: Declines in oil prices will lower headline inflation with sharp fluctuations in prices complicating monetary policy.

Extent and duration of moves are crucial

The scale of oil price rises and the duration of increases are key factors in determining the outlook for global economies and potential policy responses. A relatively short-lived increase in prices tends to have only a limited impact, but substantial and extended gains in energy are much more important.

Global central banks consider underlying inflation to be more important and will tend to ‘look through’ short-term changes in inflation driven by changes in oil prices. It is, however, much more difficult to ignore sharp and sustained increases in prices, especially given the potential impact on inflation expectations. In 2018, currency volatility has been at record high also because of major and sudden oil price movements. 

Central banks and governments can worsen the situation

The central bank and government responses to changes in oil prices and inflation are also key elements in determining whether individual and global economies can weather sharp shifts in prices.

Given that higher energy prices increase inflation, there is pressure to raise interest rates in response to an increase in oil prices. Higher interest rates, however, tend to dampen activity further which can push economies into recession, especially as there will already be net damage from higher energy prices.

Although central banks also monitor underlying inflation, there is an important risk that any move to raise interest rates in response to higher inflation will amplify an economic downturn

Similarly, there is also a risk that lower energy prices will lead to complacency over underlying inflation and central banks can set monetary policy too loose for the underlying economy which leads to financial instability.

Fiscal policy is also a key element with governments of exporting countries needing to pursue counter-cyclical policies to smooth economic cycles. Reckless spending during an upturn will substantially increase the risk of a steep downturn when energy prices decline.

Sharp variations within Individual economies

In broad terms, the impact on economies will depend on whether countries are net importers or exporters of crude. Countries that are net exporters benefit from higher oil prices while countries which are net importers are damaged by higher oil prices. The corollary is that exporters suffer economic damage when oil prices decline and growth tends to be stronger when oil prices increase.

The impact tends to be magnified by the impact on government finances as revenue declines when oil prices come under pressure.  An unsustainable boost to fiscal spending in times of high oil prices is particularly dangerous as governments are then unable to respond by increasing spending in a downturn


Canada's economy concept with canadian flag and money dollar currency golden symbol.Among the G7 economies, the largest impact is seen in Canada. When oil prices increase, there is a direct boost to the economy and there is also a positive impact on capital spending as companies boost exploration.

In contrast, a decline in oil prices has an important negative impact on the economy. The Canadian impact is magnified by the fact that most of the Canadian oil is produced from high-cost fields which quickly become unprofitable as prices decline.

Higher oil prices tend to strengthen the Canadian dollar while the currency weakens when oil prices come under pressure. When oil prices collapsed from late 2014, the Canadian economy weakened sharply and the Bank of Canada lowered interest rates to 0.5%. The Canadian dollar also came under sustained pressure with USD/CAD fx rate peaking above 1.4500.

There has, however, been a stronger trend over the past 18 months and the central bank has increased interest rates to 1.25% and the Canadian dollar is stronger than 2016 levels.


The UK is only still a small net exporter of oil and there tends to be a very limited positive net economic impact from gradual increases in oil prices, but sharp increases are damaging.

Euro-zone and Japan

The Euro-zone and Japan are heavy net importers of oil and their economies weaken when oil prices increase sharply.

The Euro-zone impact was magnified in the last cycle by the fact that the ECB responded to higher oil prices in 2014 by raising interest rates. This had the effect of triggering notable demand weakness with a sharp downturn in growth.

When oil prices declined, Euro-zone inflation moved into negative territory and the central bank was then forced to introduce quantitative easing in order to ease deflation fears.

Overall, the yen and Euro tend to lose ground when oil prices increase.


There is a mixed US impact given the shifts seen over the past five years. Developments in fracking technology have enabled US producers to extract shale oil more effectively and at much lower costs than previously

There has been a sharp increase in domestic production to record highs. In this context, the US is now less sensitive to the impact of higher oil prices, but there is a larger impact from declines in prices, especially in Texas. Overall, the dollar implications are relatively neutral.

Emerging markets

Within emerging markets, Russia is a clear beneficiary from higher oil prices with a smaller positive impact on Mexico. In contrast, countries such as Taiwan and South Korea lose out from higher energy costs. China is also a major oil importer and higher energy costs will tend to undermine the economy.

Cyclical trends are a feature

There is inevitably an important cyclical impact as higher prices will increase the risk of global recession and weak demand will pull oil prices lower again. Low prices will also eventually trigger a global growth recovery.

There is, therefore a solid case for selling the Canadian dollar when prices are very high and buying when prices weaken sharply and take similar actions with other currencies based on their import/export status as well as the duration and magnitude of movements in the oil prices.


More similar posts:

Cost of Living in Switzerland Vs UK

Cost of Living in Switzerland Vs UK

The UK and Switzerland are both exceptional countries that offer promising prospects for anyone looking to relocate. However, when it

Cost Of Living In Spain Vs UK

Cost Of Living In Spain Vs UK

When it comes to the cost of living in Spain versus the UK, it’s clear that the Spanish know how

Cost Of Living In New Zealand Vs USA

Cost Of Living In New Zealand Vs USA

Between New Zealand and the United States of America, the cost of living is cheaper by up to 22% in

Cost Of Living In Canada Vs UK

Cost Of Living In Canada Vs UK

Are you thinking about relocating to Canada or the UK and curious how much it will cost to live there?

Cost Of Living In Australia Vs Canada

Cost of Living in Australia Vs Canada

Whether you prefer the Land Down Under or the Great White North, both Australia and Canada offer a high standard

Cost Of Living In Australia Vs UK

Cost Of Living In Australia Vs UK

Australia and the UK offer compelling relocation options owing to their top-notch educational systems, high standards of living, and diverse

cost of living Spain vs USA

Cost Of Living In Spain Vs USA

The United States of America and Spain are among the best places to live in the world, but they are

cost of living France vs USA

Cost Of Living In France Vs USA

France is a treasure mine of history, stunning architecture, and delectable gastronomy. Living there comes at a steep price, which

cost of living australia vs US

Cost Of Living In Australia Vs US

The United States and Australia are two countries on the list of attractive destinations for international migrants. There are several

Cost of Living in Portugal vs USA

Cost of Living in Portugal vs USA

Depending on your personal needs and preferences, living in Portugal or the United States can be a wonderful experience. Although

Cost of living in Colorado vs Texas

Cost of living in Colorado vs Texas

Cowboys and rodeos, delicious food and beer served in generous amounts, and a Wild West heritage — Colorado and Texas

Economic Calendar UK

The table below, detailing the most important economic events that impact the economy and currency rates in 2023, can help

Brexit: Timeline, Impact and Aftermath

It’s January 31, 2023 and it’s been three years since the momentous occasion of Brexit. The United Kingdom’s departure from

Terrorism’s Impact on Economy

When there are terrorist attacks, globally, and they are making headlines , shocking the whole free world, many investors, workers,

Cost of living Florida vs California

Cost of living in Florida vs California

If you love the tropical climate and are keen on living the laidback beach life, you’re probably debating moving to

Cost of Living New Zealand Vs Australia

Cost Of Living In New Zealand Vs Australia

Australia and New Zealand are among the most popular choices for those looking to move to a country with a


Technical Analysis for Beginners

If you understand the fundamentals of foreign exchange rates like economic indicators and wish to be able to do comprehensive

South African Emigration Patterns and Their Impact on the South African Economy

Recently it has become popular for the white population of South Africa to emigrate to other countries. Given that the

Major Historical & Economical Events Which Impacted Currency Rates

As long as people have been using money, economic events have had a major impact on humanity. History has been

interest rates

The fine links between Inflation, Interest Rates and Government Bonds

If you want something even broader than this you can have a look at our how the economy impacts currency

Economic Indicators

Undervalued and Overvalued Economic Indicators

Today, we will look at what I think are the three most useless economic indicators that investors and traders should


Why over-regulation doesn’t protect customers

Regulation is supposed to be a means of controlling something, or at least, restricting its effects. Typically, regulation in any

Oil Prices Impact on Currency Rates

Oil Prices Impact on Currency Rates and Economy

Changes in oil prices are a vital component for the global economy given the impact on both growth and inflation.

Currency Pegging

What is Currency Pegging and Is It Healthy for the Economy?

Various countries and governments around the world have been seeking to stabilize their countries’ economies by pegging their domestic currency

trade deficit

Trade Account: How Does it impact currencies?

A fundamental building block of currency valuations Although data can receive little attention for extended periods, the trade performance is


What is the LIBOR rate and how does it impact currency rates?

The London Interbank Offered Rate (LIBOR) plays a key role in the global currency economy and in major currency events in

International Invoicing for SME's

International Invoicing for SME’s

Small and medium enterprises (SME) in the UK are increasingly trading on a global scale. Foreign trade allows them to