Both the stock market and the forex market are set to have less volatile trading activities as the international prices of crude oil begin to regain stability. After several weeks of hyperinflationary rise in the price of oil, speculations that global oil supply will be disrupted have significantly abated. After approaching very near to their highest levels since 2008, the various oil price benchmarks reversed their upward trends and began to stabilise.

Last Thursday (February 17), the international prices of crude oil reached 30-moth peaks then they edged downwards the next day. The political turmoil in the Arab region continues to support market speculations about possibly disruptions. The crisis in Libya, for instance, remains unresolved and even has the possibility of escalating into a full-blown civil war. Nonetheless, there is some glimmer of hope as various governments in the region try to initiate reforms and introduce economic aids to their respective citizenries.

The reassurances of Saudi Arabia that it would expand its oil production to offset the oil production losses in Libya have resulted in higher investors’ confidence. These also reduced market pressures on the international trading prices of crude oil. Despite of the relatively recent oil price stabilisation trends, the foreign exchange value of the dollar remains weak against a basket of other foreign currencies.

The forex weakness of the dollar is not surprising considering the oil price hike momentum in the past few weeks since the pro-democracy uprisings in the Arab world began to spread. One does not need to become a forex trader or an economist to understand the correlation between oil price and the value of the US dollar.

Since the US dollar is being used as a major invoicing currency for the international trade of crude oil, the prices of oil ten to drop when the dollar strengthens in the currency markets. On the other hand, if the US dollar weakens, the international trading prices of oil go up. There is an inverse correlation between the two. However, the recent lethargic performance of the US dollar was also affected by the perceptions that the US economy will be badly hit by oil price inflation.

Although energy-related sector had some significant gains in the past few weeks, the general trend of the stock markets was bearish as investors took flight from risky assets. There were serious market fears and speculations that the crisis in the Arab world would be hard to contain and would result in the global disruptions of oil supply. However, the trend started to reverse as the oil price volatility showed signs of abatement last Friday. The bullish market trend continued in today’s Asian market session. The optimistic economic prospects in Japan also helped in the bullish sentiments. Japan’s recent retail trade figures for the month of January were higher than expected.

The worldwide market trends were generally bullish for the past one year. It seems that the slide last week was a short-term weakness, which may easily be offset as the markets recover from the oil price volatility. Investors are likely again to take more risk and sell-off their ‘safe-haven’ assets such as the US dollar. Consequently, the forex value of the dollar is expected to weaken further. Meanwhile, the loose monetary policy of the Federal reserve will also contribute in the weakening of the dollar.