Why Do Commodities Go Up When the Dollar Goes Down?

November 17, 2010Investingby EW Content Team


Have you ever noticed that whenever commodities go up it is usually at a time when the dollar is down? It seems to work the opposite as well- when the dollar is up commodity prices are on the way down. There is mixed opinions on this one. Let us take a closer look.

According to financial analysts this correlation may seem to take place although it does not always happen. It is not a given that commodities will go up when the dollar takes a dive. However it is happening at this point in time. The reason for this is because the US economy is slowing down at the same time that the world economy is also slowing down. However the vast majority of investors believe that the economy in the United States is doing better than the economies in other countries across the globe. 

The slowdown of the American economy has decreased the demand for commodities and therefore the price of them. Bad economic news from other countries across the world is reaching the ears of many frightened international investors and is affecting how they invest and where they invest. For this reason there are many investors that are choosing to invest their money in the United States. They feel it is safer than investing in their own countries. What this serves to do is to increase the demand as well as the exchange rate for the American dollar. 

It is also worth mentioning that when the American dollar rises it may be in part due to the decreasing of the US trade deficit. If the United States chooses not to buy as much from other countries across the planet then this occurs. This means that those from other countries receive fewer American dollars. The American dollar is used a tremendous amount in international trading. When those from other countries are not able to exchange their own currencies into American dollars this increases the demand as well as the price for the American dollar.  

Commodities and the dollar are often connected whether we like it or not. A number of commodities such as gold, silver, platinum, gas and oil tend to go up when the dollar is shrinking. When the US dollar loses value exports increase. This is because foreign countries are then able to purchase American goods and services for cheaper prices in their own currencies.
When the American dollar is strong this automatically makes US goods and services more expensive to purchase. Theoretically speaking the higher prices for these goods and services make them more difficult to sell to overseas markets. As well this means that American companies that do business abroad bring in a lesser amount of money when the earnings they make are translated from the currencies of other countries into dollars. 

It is also worth mentioning that the dollar, as represented by the US dollar index, has dropped greatly since hitting a peak in June of this year. At the same time the stock market in the United States has risen since the summer months. What this suggests is that there is an inverse correlation between the American dollar and stocks that has remained intact.

Due to the fact that many commodities such as oil are denominated in American dollars this means that in recent months the weakening of the dollar has given them a boost. This in turn also serves to drive up the stock prices and earnings of companies such as Chevron Corp. and Exxon-Mobil. Analysts believe that the inverse correlation between the dollar and stocks is likely to continue well into the upcoming year.

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