How Does a Weak Dollar Affect Commodities?

The Forex world is watching the U.S. Federal Reserve to see where interest rates and therefore the dollar go next. The dollar has weakened this year as it has become apparent that the Fed is not going to be overly aggressive in raising interest rates. Considering that a weaker dollar may be the norm this year how does a weak dollar affect commodities? The Daily Mail reports that aluminum hits a 9 month high on the weak dollar.

Aluminum hit a nine-month peak on Friday as speculators pushed prices higher thanks to a weaker dollar, but analysts were wary about a possible retreat.

Copper and other industrial metals also clawed higher ahead of new economic data in China that investors hope will confirm that a recovery there is gaining strength.

“You look at aluminum, the only buying this week has been CTA buying, we still see no consumer activity, they’re not chasing this price rally,” said Citi analyst David Wilson.

How a weak dollar affects commodities is merely a matter of arithmetic. Commodities value is based on supply and demand. Commodities are also denominated in US dollars. When the dollar falls, commodity value stays the same but commodities cost more in weaker dollars.

How about Gold?

Gold and other precious metals also rise in price as gold drops. In fact, gold often is more responsive to a fall in the dollar because there are gold buyers who simply distrust all paper currencies and respond to a weaker dollar as though the financial world will soon collapse. Even when the dollar rallies these folks trust gold and distrust so-called fiat currencies. Bloomberg Business reports on how gold investors bet on a resilient rally.

Add a jump in open interest to signs that gold’s rally may persist after the best start to a year in a decade.

Open interest, a tally of outstanding contracts in Comex futures, rose 3.1 percent to 565,774 on Tuesday, the highest since January 2011. The same day, investors boosted holdings in exchange-traded funds backed by the metal for a sixth straight session to the highest since December 2013. The increases come after hedge funds boosted net-long positions in bullion futures and options more than five-fold since early February.

The smart money, it would seem, is betting on a weaker dollar and stronger gold as well as other precious metals and other commodities.

What Is Pushing the Dollar?

If it is a weaker dollar that is driving commodity prices and not stronger demand, what is pushing the dollar? The Australian Financial Review says it is all about Janet Yellen the Fed Chairman. Her words hold sway over the US dollar.

Janet Yellen, Federal Reserve chair, and her central bank counterparts in Europe and Japan are turning on its head that idiom about actions speaking louder than words.

Ms Yellen, through words rather than deeds, is wielding a greater influence over currencies. Her caution over the pace of tightening, as expressed to the Economic Club of New York in March and the Fed meetings either side of that speech is the defining theme in foreign-exchange markets.

And when Yellen speaks it all has to do with interest rates. How fast the Fed raises rates will depend first on the strength of the U.S. economy and then on the strength of the global economy and how that will affect the USA. The dollar will be weak so long as rates remain low and commodities, as valued in dollars, will remain stronger.