Every Commodity Benefits From A Falling Dollar

For the first time since June 2014, the Dollar Spot Index yoy% was negative in March. That was one of the main reasons commodities had such a strong month with the S&P GSCI gaining 4.9% and Dow Jones Commodity Index (DJCI) up 4.0%. Since commodities are priced in US dollars, when the dollar rises, it hurts commodities.

Source: S&P Dow Jones Indices and Bloomberg.

Source: S&P Dow Jones Indices and Bloomberg.

However, not all of the commodity market demise can be blamed on the the strength of the US dollar. Historically in the past 10 years, there is a -0.60 correlation between the rising dollar and commodities, meaning the relationship is negative but not very strongly. More importantly, when the dollar rose year-over year, it increased on average 8.1% driving commodities down 7.0% on average. While some economically sensitive commodities are moved more by the rising dollar, especially in energy, many are less sensitive and some even rise with a rising dollar.

Source: S&P Dow Jones Indices.

Source: S&P Dow Jones Indices. For every 1% move up for the dollar, the up $ market capture ratio measures how much each commodity moves. For example, if the dollar rose 1%, nickel fell 1.907%. When the dollar rose 1%, feeder cattle rose 0.746%.

When the dollar rises, it is possible some opportunistic buying happens to take advantage of cheaper commodities, helping the prices from falling even further. On average the up $ market capture ratio for the commodities is -87.2, meaning for every 1% the dollar rose, commodities on average fell 0.872%.

Now that the dollar has started to fall, it is interesting to note how much more power a falling dollar has in boosting commodities than a rising one hurts. On average when the dollar fell it fell 6.5% year-over-year, pushing commodities up on average 25.5%. The average down $ market capture ratio for commodities is -393.2, meaning for every 1% the dollar fell, commodities on average rose 3.932%. The falling dollar is 4.5 times more powerful than the rising one on commodities. Plus every single commodity benefits from the falling dollar, with the metals gaining most.

Source: S&P Dow Jones Indices.

Source: S&P Dow Jones Indices. For every 1% move down for the dollar, the down $ market capture ratio measures how much each commodity moves. For example, if the dollar fell 1%, lead rose 7.154%. When the dollar fell 1%, natural gas rose 0.687%.

Not only does every single commodity benefit from a falling dollar, but only natural gas gets hurt more by a rising dollar than it gets helped by a falling one. It may be since it is so difficult to store.

Source: S&P Dow Jones Indices.

Source: S&P Dow Jones Indices.

If the Fed continues its more dovish sentiment, the dollar may fall more, which could be highly beneficial for commodities.

 

The posts on this blog are opinions, not advice. Please read our disclaimers.

3 thoughts on “Every Commodity Benefits From A Falling Dollar

  1. Brenda

    I have never understood why this phrase should be true “Since commodities are priced in US dollars, when the dollar rises, it hurts commodities.” Let’s say a South African miner digs some platinum out of the ground and sells it to a US buyer. That night the USD goes up but nothing has changed in South Africa. The miner digs up more platinum, but now the US buyer has more purchasing power. His USD should buy more platinum, not less. The miner’s costs haven’t changed; why doesn’t his weaker currency make his product more attractive (cheaper).

    Reply
    1. Jodie GunzbergJodie Gunzberg Post author

      As the US dollar rises, it takes fewer dollars to buy the commodity so hurts commodity prices. For example, if a barrel of oil is $100 today, but at a later date the US dollar doubles, then the barrel of oil only costs $50. Of course this is “ceteris paribus” or all else equal. Other fundamental factors matter too that impact supply, demand and inventories of the commodities.

      Reply

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