A picture, even if it is as aesthetically pleasing as this piece of garbled mish mash, says a thousand words. In a previous article I suggested that coordinated central bank intervention to save the U.S. dollar from its slippery slide could be an effective tool to knock down lofty oil prices. Lower oil prices would hurt Iran where it matters most and halt their nuclear ambitions. But let’s take this idea a step further – in the same way a strong U.S. dollar could prevent a confrontation with Iran, does a strong U.S. dollar improve stability in the Middle East?

Photo:youngrobv, Creative Commons, Flickr

To answer this question, I took a timeline of the U.S. dollar index and tagged major Middle Eastern conflicts. Yes, I admit a time period of 30 years is probably too short to arrive at empirical truth, but the correlation is surprising, to say the least. As the graph clearly shows, Middle Eastern conflicts tend to escalate when the U.S. dollar is weakening, and Middle Eastern conflicts dissipate when the U.S. dollar strengthens.

Two possible reasons for this correlation:

– A strong U.S. dollar improves the diplomatic influence of the U.S., solidifying its status as the world’s superpower, and by extension, the world’s policeman.

– The U.S. dollar tends to move inversely to oil prices, a major source of funding for organizations that may attempt to destabilize the oil-rich Middle East. If the U.S. dollar firms, oil prices drop, undermining the source of funds for conflict. As an example – if oil prices didn’t double between 2003 and 2005, do you think Iran would’ve had enough money to fund Hezbollah’s operations during the 2006 Lebanon war? 

Do you have any other explanations for this correlation?