Does a strong dollar hurt commodities?
A negative correlation between commodity prices and US dollar strength provides non-US economies with a hedge. If the US dollar depreciates when US dollar commodity prices rise, the rise in commodity prices for non-US economies, when measured in local currencies, is smaller.
The dollar's value tends to impact commodity prices because the US dollar is the most common pricing and settlement currency for commodities. When the dollar appreciates against other currencies, commodities become more expensive on the world stage, which can depress overall demand. As consumption falls, so do prices.
The Role of the US Dollar in Commodity Markets
A weaker dollar can lead to higher commodity prices, while a stronger dollar can lead to lower commodity prices. This is because most commodities are priced in US dollars, and when the dollar weakens, it takes more dollars to purchase the same amount of a commodity.
Historically, the prices of commodities have tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.
When the dollar index rises, it can lead to a decline in commodity prices because commodities become more expensive for buyers in other currencies. Conversely, when the dollar index falls, commodity prices tend to rise because commodities become more affordable for buyers in other currencies.
Why? Well, nearly all commodities are bought and sold in dollars. This means that more dollars are required to buy goods if the currency's value has fallen. Further, given that commodities are traded worldwide, a weaker dollar means commodities are less expensive in other currencies – this increases demand.
With many commodities priced in dollars, its decline can lead to an increase in demand for commodities from countries that export them, as foreign buyers can purchase more goods with the same amount of their own currency.
A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad. Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.
A strengthening dollar means U.S. consumers benefit from cheaper imports and less expensive foreign travel. U.S. companies that export or rely on global markets for the bulk of their sales are financially hurt when the dollar strengthens.
Broadly speaking, the stock market has done very well when the dollar was strengthening and weakening, and vice versa. There is no significant correlation between the two, which means the relative strength or weakness of the dollar is not a reliable indicator for investors.
Do commodities go up during recession?
In the median average recession, real gold prices have been +5% higher in the 12-months following the end of the recession, compared to the 12-months preceding its start. Other precious metals tended to be 10-15% lower, industrial metals tended to be 20-30% lower, and energy commodities tended to be “flat”.
Few assets benefit from rising inflation, particularly unexpected inflation, but commodities usually do. As the demand for goods and services increases, the price of goods and services rises as does the price of the commodities used to produce those goods and services.
Currency traders can take advantage of the fact that certain currencies tend to be correlated with commodity prices. This is often the case when a country's economy is quite dependent on natural resources. When commodity prices rise, such country's currencies tend to strengthen, and vice-versa.
The US Dollar Index (DXY) and gold prices share a negative correlation for two reasons: 1. Gold is USD denominated. When the US dollar appreciates, gold costs more for investors using other currencies.
Interpreting the USDX
An index value of 120 suggests that the U.S. dollar has appreciated 20% versus the basket of currencies over the time period in question. Simply put, if the USDX goes up, that means the U.S. dollar is gaining strength or value when compared to the other currencies.
In the foreign exchange market, commodity currencies generally refer to the New Zealand dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and the Chilean peso.
Who can be hurt by the strong U.S. dollar? – U.S. companies that sell a great deal of their product abroad. The stronger dollar causes a price increase for the U.S. produced goods in the foreign markets, making the products less price competitive and maybe less attractive.
A weak dollar is not necessarily bad, nor is a strong dollar necessarily good. A weak dollar makes imported goods more expensive for American consumers to buy, but it makes American goods a relative bargain abroad.
That means a rising dollar is likely to have a noticeable impact on these companies' revenues, earnings, and stock prices. Besides hurting earnings, a super-strong dollar can also hurt prices of US stocks and bonds by making them more expensive for big non-US institutional investors.
A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.
What are the disadvantages of a weak dollar?
The side effect is that it becomes more difficult for domestic manufacturers to compete with those reduced prices. If a foreign country's currency remains strong while the dollar falters, that can result in higher prices for imported goods. Those higher prices are then passed on to consumers.
However, commodity money also has its disadvantages. One disadvantage is that the value of the commodity can be volatile, which can lead to fluctuations in the value of the currency. Another disadvantage is that it can be difficult to transport and store, especially in large quantities.
If the dollar collapses, the value of gold would likely surge as investors rush to safe-haven assets. The ripple effects of a dollar crash would extend past just gold. Silver, another precious metal backing a Kinesis cryptocurrency (KAG), would likely see a boost in value as well.
The Kuwaiti dinar continues to remain the highest currency in the world, owing to Kuwait's economic stability. The country's economy primarily relies on oil exports because it has one of the world's largest reserves.
Iranian Rial (IRR)
Currently, the Iranian Rial is considered the world's least valuable currency. This is the result of factors like political unrest in the country. The Iran-Iraq war and the nuclear program also played a huge part.
