Commodities And The US Dollar: What’s The Relationship?

By Bryan Rich on June 15, 2009 | More Posts By Bryan Rich
The dollar can’t manage to find its way out of the limelight these days. There’s speculation about its demise and the loss of its world reserve currency status. It’s even blamed for higher gas prices.

Moreover, the mainstream media has attributed much of the recent climb in commodity prices to recent weakness in the dollar. On the surface, it’s a logical enough argument. After all, commodities like gold, oil, and grains are all priced in dollars. Therefore, if the dollar weakens the value of the commodity shouldn’t be penalized. With that logic, it should strengthen to maintain its value on the global stage.So all things remaining equal, the commodity should move in the directly proportional opposite direction of the dollar.

The only problem with this argument is that all things never remain equal …
As the dollar rallied last week, so did the price of oil.Market analysts, traders and journalists will always go to the stable of cause-and-effect market relationships to explain the day-to-day moves in financial markets.For instance, weeks ago it was the weakness in U.S. Treasury bonds that was weakening the dollar. Then last week, it was the weakness in Treasury bonds that was strengthening the dollar. And now, the recovery in commodity prices over the last fourteen weeks is being linked to a weak dollar. But as the dollar rallied last week, so did oil - a contradiction to this relationship.