Yahoo Finance Why Commodity Prices Could Stay Low
Why the Dollar’s Strength Can Continue
To be sure, for this cycle, in particular, predicting currency movements requires divining the behavior of the world’s major central banks. The process is further complicated by the fact central bank policy now includes unconventional monetary policies in addition to changes in interest rates.
That said, assuming the dollar continues to appreciate over the longer term, there are several implications for investors. A dollar that remains strong, albeit with some reversals, would put downward pressure on inflation and the earnings of US exporters. Commodities are also likely to struggle in an environment characterized by a stronger dollar and rising real rates.
Market Realist – Commodity prices could stay low as the dollar strengthens and real rates rise.
The graph above compares the dollar index (UUP) with the WTI (West Texas Intermediate) crude oil (USO) price. The two tend to move in opposite directions.
There’s a strong inverse relationship between the US dollar and commodity (DBC) prices. One of the reasons is that commodities are priced in dollars. When the value of the dollar increases, it takes fewer dollars to buy commodities, and vice versa. In fact, movements in the dollar explained as much as 77% of the crude oil price movements in the last 30 years.
As the dollar is likely to get stronger, commodity prices could stay subdued, negatively affecting commodity-exporting economies like Brazil (EWZ).
The second graph compares crude oil prices with real interest rates, which is the difference between nominal interest rate and the inflation rate. We have used the yield on the ten-year Treasury (IEF) as a proxy for the nominal interest rate in the graph.
As you can see, crude oil prices have exhibited an inverse relationship with real interest rates as well. Other commodities, especially gold (IAU), also move in the opposite direction.
The strong dollar as well as rising real rates are likely to affect commodities adversely.
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