Commodity Prices Affected by Strengthening Dollar

Commodity Prices Affected by Strengthening Dollar

Commodity prices have recently been affected by strengthening dollar, with oil, gold and wheat leading the decline. The U.S. dollar rose at the end of May after Federal Reserve chairwoman had commented that she expects the U.S. economy to strengthen this year. Subsequently, her words were supported by the data – a rise in the dollar index and U.S. consumer confidence data.

Stronger dollar generally depresses commodity prices as they get more expensive for holder of other currencies. Commodity traders moreover dislike the strong dollar since it impacts financial market stability. According to Suki Cooper of Barclays, “there’s been a sell-off in the wider commodities space on macro factors”. Morgan Stanley, another investment bank, has commented that the strengthening dollar has driven much of oil price volatility over the past month.

Brent crude has therefore had hard time to get higher since it reached $70 a barrel. At the same time, increasing OPEC supplies pressure cargo prices amidst signals that the American oil sector might be more resilient than initially thought. Morgan Stanley added that “a stronger U.S. dollar would only reinforce our near-term concerns for oil prices, especially Brent”. Other commodities, for example base metals like aluminium or copper, have also been affected by the rising dollar.

The U.S. dollar stopped being commodity money in August 1971 when President Richard Nixon announced that the government would “suspend temporarily the convertibility of the dollar into gold or other reserve assets”. Although the dollar is not officially tied to the price of gold anymore, it is generally believed that commodity prices and the dollar’s value are strongly linked even today. Not only a strong dollar makes commodities more expensive for holders of other currencies but it can also dampen demand or incentivize producers to increase output.