I understand price of oil is based on the USD, but why does the price of one inversely affect the price of the other?Why is there an inverse relationship between the price of oil and the value of the dollar?
Oil is sold on a world market, so even domestically produced oil price behaves like imports, and when the dollar falls in value imported goods cost more. That is we are bidding for oil against countries using Euros, pounds yen etc.
Why is there an inverse relationship between the price of oil and the value of the dollar?
It can be oil or anything when the dollar is worth less.
A devalued dollar is usually the result of inflation. Inflation means there is a glut of dollars in the market. There are so many dollars on the market that it makes each one worth less. What results is people having to raise prices because it takes more money to equal the real value of the good.
So when we print too much money, nations that denominate oil in dollars see that as a devaluation of the dollar. To make up for their loss, they raise the dollar price.
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