Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

The Fall Of The U.S. Dollar Creates A Potent, Bullish Cocktail For Commodities

By Andy HechtMarket OverviewAug 04, 2020 09:49AM ET
www.investing.com/analysis/the-fall-of-the-us-dollar-creates-a-potent-bullish-cocktail-for-commodities-200532788
The Fall Of The U.S. Dollar Creates A Potent, Bullish Cocktail For Commodities
By Andy Hecht   |  Aug 04, 2020 09:49AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com

  • US dollar falls through critical technical support
  • Metals are watching the greenback
  • Energy and agricultural prices are also sensitive
  • 2008-2011 could be a sign that a weaker dollar will turbocharge commodity prices

The US dollar is the global reserve currency. That status is allocated to the foreign exchange instrument that the world perceives as the most stable from an economic and political perspective. Central banks hold reserve currencies for international commerce and balance of trade reasons.

As the leading reserve foreign exchange instrument, the dollar is also the international pricing benchmark for commodities. A rising dollar tends to weigh on raw material prices, while a falling dollar often causes commodity prices to move higher.

The Dollar Index measures the value of the USD against other leading reserve foreign exchange instruments. Since the euro is also a reserve currency, the index has an over 57% exposure to the European single currency.

The Dollar Index reached a low of 88.15 in February 2018. It rose to a high of 103.96 in late March during the risk-off conditions caused by the global COVID-19 pandemic.

Since then, the index has turned lower and broke through critical technical support levels. The decline of the US dollar has been one factor driving many commodity prices higher.

US dollar falls through critical technical support

Last week, the Dollar Index fell below a level that could be a gateway for a test of the February 2018 low.

DXY Monthly 2010-2020
DXY Monthly 2010-2020

Source, all charts: CQG

The chart above highlights that the September, Dollar Index futures contract fell to a low of 93.33 on July 29, below the September 2018 low of 93.395. With the break below technical support, the downside target is now at the critical resistance level at 88.15.

Price momentum and relative strength indicators on the monthly chart are falling, and historical volatility is rising as monthly trading ranges have expanded. Open interest, the total number of open long and short positions in the Dollar Index futures contract, has been rising since June as the index declined.

Increasing open interest along with falling price is typically a technical validation of a bearish trend in a futures market. The technical signs in the Dollar Index are pointing lower.

Since the dollar is the benchmark pricing mechanism for many commodities, the dollar’s decline is pushing commodity prices higher.

 Metals are watching the greenback

Gold is both a currency and a commodity. Central banks worldwide hold the yellow metal as an integral part of their foreign currency reserves.  

Gold Quarterly 1988-2020
Gold Quarterly 1988-2020

The quarterly chart of COMEX gold futures illustrates that the yellow metal rose to a new high last week. The price surpassed the 2011 peak at $1920.70 and was at over the $1970 level last Friday.  

Silver Monthly 2008-2020
Silver Monthly 2008-2020

The monthly chart of COMEX silver futures shows that the precious and industrial metal fell below $12 per ounce in March and more than doubled in value by the end of last week with the price over the $24.60 level.  

Copper Weekly
Copper Weekly

Copper, the red nonferrous metal that is a barometer for the global economy’s health and wellbeing, recovered from below $2.06 per pound in mid-March to over $2.85 as of July 31.

The falling dollar has been a supportive factor for the prices of precious and industrial metals.

Energy and agricultural prices are also sensitive

In April, the price of NYMEX crude oil futures fell into negative territory for the first time since crude futures began trading in the early 1980s.  

Crude Oil Weekly
Crude Oil Weekly

The weekly chart shows an over $80 per barrel recovery from negative $40.32 to over $40 per barrel at the end of last week. While producer quotas and declining output served to balance the fundamental equation in the oil market, the weaker dollar was another factor that boosted the price of the energy commodity.

Soybeans Weekly
Soybeans Weekly

Soybean futures have also moved higher since April. At the same time, corn and wheat futures have also posted recoveries.  

Sugar Weekly
Sugar Weekly

ICE Sugar futures rose from a low of 9.05 cents per pound in April, the lowest level since 2007, to the 12.60 cents level. Energy and agricultural commodity prices have also been finding support with the assistance of a falling dollar. 

2008-2011 could be a sign a weaker dollar will turbocharge commodity prices

A combination of a falling dollar and unprecedented monetary and fiscal stimulus levels from central banks and governments creates a potent bullish cocktail for the commodities asset class.

DXY Quarterly 1988-2020
DXY Quarterly 1988-2020

The chart shows that the dollar index fell from a high of 89.71 in early 2009 in the aftermath of the global financial crisis to a low of 72.86 in 2011. Most commodities prices rose to multiyear or all-time highs in 2011 and 2012.

While the path of the Dollar Index is only one factor when it comes to commodity prices, a weak greenback tends to be bullish. We could be on the verge of a substantial rally in the raw materials asset class over the coming months and years.

In 2020, the stimulus levels are far higher than following the financial debacle a dozen years ago. Fasten your seatbelts; commodity prices could be heading a lot higher than most analysts believe possible.

The Fall Of The U.S. Dollar Creates A Potent, Bullish Cocktail For Commodities
 

Related Articles

Jeffrey Halley
Variable Side Effects By Jeffrey Halley - Jun 18, 2021

The response by the markets to the FOMC dot plot shock has been variable, to say the least, and not a little surprising to me. Equities did their duty and eased, but not,...

The Fall Of The U.S. Dollar Creates A Potent, Bullish Cocktail For Commodities

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (5)
KC Cl
KC Cl Aug 04, 2020 5:26PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I want to see what happens to these commodities when the dollar bounces...
A Nasiru Ibrahim
A Nasiru Ibrahim Aug 04, 2020 11:22AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
this is you approach
Filippo Bulgarini d Elci
Filippo Bulgarini d Elci Aug 04, 2020 10:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Can't believe u didn't mention the most important hedge against inflation and fiat currencies devaluation... Bitcoin!
adam abdulrahman
adam abdulrahman Aug 04, 2020 10:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
its the biggest fraudulent "currency"
Filippo Bulgarini d Elci
Filippo Bulgarini d Elci Aug 04, 2020 10:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Lol poor guy... It's so fraudulent that is adopted by big companies day after day, and big investors like Paul Tudor are buying... U don't know what Bitcoin is, so please do your research.
Andru Shev
Andru Shev Aug 04, 2020 10:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Watch the review of the "big money" transfer in the bitcoin. All big money go out.. Only small and midle cash come.
Stak Hard
Stak Hard Aug 04, 2020 10:38AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thank you sir. Nicely done
JP JATTAN
JP JATTAN Aug 04, 2020 6:46AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Professional approach 👍
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email