COTW: U.S. Dollar vs Commodities

September 26, 2022COTW: U.S. Dollar vs Commodities

  • The U.S. dollar has historically had an inverse correlation to commodities. When the dollar strengthens, commodities become more expensive in non-U.S. currencies, which tends to lead to lower demand and thus lower prices. The inverse applies to dollar weakness.
  • This relationship temporarily broke down over the 18-month period starting in 2021, as both the dollar and commodities rallied in tandem. The rise in the commodity index was predominately driven by higher energy prices as global demand increased post-COVID-19 lockdowns, while supply has been constrained by the Russia-Ukraine war. The dollar on the other hand has been a beneficiary of this global uncertainty, given its perceived safe-haven status.
  • The relative attractiveness of U.S. Treasury yields has provided further support for the dollar, as the Fed has taken a more aggressive stance in fighting inflation, hiking rates faster than its developed market peers. The U.S. dollar index has gained 17.9% year to date.
  • Commodity prices have recently come under pressure – crude oil is down over $40 dollars per barrel from its June highs – as inflation takes its toll on global economic growth, calling the resilience of global demand into question.


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