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July 25, 2016 at 06:30 AM
Relationships in the financial world, just like in human life, can wax and wane. A falling or rising U.S. dollar, for example, often has an impact on commodity prices, but that relationship doesn’t always hold sway in buying or selling decisions. Many commodities, though priced in dollars, are more influenced by current economic or supply/demand fundamentals.
“How U.S. dollar strength or weakness [impacts] commodities and which has a more powerful effect depends,” says Alfonso Esparza, senior currency analyst at Oanda in New York. “Why is the dollar moving? Right now post-Brexit, we’ve seen two modes: 1) a flight to safety; the dollar gets strong because something abroad is giving the dollar strength, or 2) strength is based on economic fundamentals. Last week we saw great numbers with retail sales. But the dollar didn’t listen to fundamentals the week following Brexit.”
In April, when the dollar was falling, S&P Dow Jones Indices published a report that found that “The falling dollar is 4.5 times more powerful than a rising one on commodities. Plus, every single commodity benefits from the falling dollar, with metals gaining the most.”
The thing is, many analysts don’t see the dollar as a main driver of commodity prices.
“The general theory is when the dollar weakens, commodities go up,” says Edward Meir, director of the Commodity Research Group in New York. But “relationship varies complex to complex,” says Meir. “Metals are affected by the dollar, but we find the relationship isn’t as inversely correlated as, say, gold. Gold is more predictable. Dollar strengthens, gold goes down.
“A weaker dollar does affect base metals, but then the relationship breaks down and base metals do their own thing. That’s because those metals draw on what’s happening in China more than anything else…. What I find following these markets is that certain relationships govern for awhile until they don’t.”
Complicating things is the uneven impact of the dollar’s move on certain commodities. For example, natural gas is more hurt by a rising dollar than helped by a falling one because it’s difficult to store, S&P Dow Jones noted.
