BUZZ-COMMENT-Oil the unknown quantity that's key for currencies

Jan 23 (Reuters) - The direction of oil is key for currencies and although its surge in early 2025 supports those of producers such as the United States, it also heightens the chance that OPEC and Russia increase supply which could undermine the greenback.

Crude has got cheaper but the drop below crucial levels around $70/bbl that could have resulted in a much lower trading range did not materialize.

Instead this year started with a $12/bbl surge from the base of long-term ranges toward their middle. Brent is still $9/bbl above levels trading last month, making it tougher for central banks to meet widespread expectations for interest rates to be lowered.

The rise does have a silver lining as it will encourage producers to increase supply as they planned last year. Plans scuppered when oil fell to the bottom of ranges traded since the COVID pandemic may well be put into practice.

If production is raised, and oil drops to last year's low and potentially far below it, it will heighten the chance that the Federal Reserve lowers the U.S. interest rate further and faster than currently expected.

This will have a material effect on FX markets where traders gambling on the dollar rising have driven it up, resulting in an overbought situation that warrants a correction.

The stronger dollar which effectively tightens monetary policy will allow more room for the Federal Reserve to ease policy at a point when the chance of interest rate cuts in 2025 has been almost entirely erased.

Should Russia - which certainly needs the cash given the huge expense of the Ukraine war - and others hike output, there could be a sea change in FX flows with cash pouring out of the U.S. toward nations that rely on energy imports like Japan, Britain, China, India and the euro zone.

For more click on FXBUZ