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How the Dollar Impacts Commodity Prices

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How the Dollar Impacts Commodity Prices
Commodities typically follow and inverse relationship with the value of the dollar. When the dollar strengthens against other major currencies, the prices of commodities typically drop. When the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.

You can see from the chart how this inverse relationship works. The green line represents the price of the dollar index, which is the value of the dollar against a basket of other major currencies. The black line is the CRB Index. This is an index of a group of diversified commodity prices. As the dollar moves higher, commodities generally move lower. The opposite happens as the dollar moves lower. It is not a perfect correlation, but it is fairly close.

There are many reasons why the value of the dollar has an impact on commodity prices. The main one is that commodities are priced in dollars. When the value of the dollar drops, it will take more dollars to buy commodities.

Another reason is that commodities are traded around the world. Foreign buyers will purchase our commodities – corn, soybeans, wheat, oil, etc. – with dollars. When the value of the dollar drops, they will have more buying power and simple economics tells us that demand typically increases as prices drop.

Commodity traders often keep a close eye on the value of the dollar. An easy way to monitor the dollar is to watch the price quotes on the Dollar Index on the ICE Futures Exchange. It is an index of how the dollar is valued against a group of other major currencies around the world. The price of the index is traded like any other futures contract and you can get quotes throughout the day.

Commodity prices don’t necessarily tick higher for every tick lower in the Dollar Index, but there is a strong inverse relationship over time. Individual commodities can also buck the trend if other overwhelming forces are causing the price to move along with the dollar.

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