US Dollar and Commodities

Apr 24, 2008: 9:56 PM CST

One of the major intermarket relationships is that of the US Dollar Index and various Commodity Prices. Generally, the US Dollar trades strongly inverse commodity prices.

Let’s look at it before discussing it further:

Typically, a falling US Dollar index is inflationary, and inflation occurs with higher commodity prices (I am using the CRB Index in this example, though there are other indexes some traders prefer).

Commodities refer to gold, crude oil, wheat, rice, silver and other prices that don’t necessarily trade together as a unified whole, but often share similar trends.

It’s important to note that the CRB Index has made new highs while the dollar has made new lows. This is a fascinating relationship to track, and you can track it with individual commodities.

Remember that some commodities are ‘safe havens’ from inflation, and gold is one of those. Oil is quoted in US Dollars, so that when our index falls, oil prices rise accordingly due to currency aspects.

A country’s currency speaks to the health of the economy (what does that say about the current state of the US Economy?), but a weaker currency isn’t horrible news for a country.

Multi-national companies (think big, blue chip stocks) often do well due to favorable conversion rates back into US Dollars, but sometimes small cap stocks are hurt by a weaker currency.

American tourists fare poorer shopping overseas than do those visiting the US and converting their home currency into dollars. But that is for another post.

Let’s continue to view the inverse relationship on a lower time-frame:

There is much to learn about intermarket relationships, but it can often help to begin your analysis with the Dollar (currency) trend and then build from there.

It’s not as important where you start your analysis, because it all revolves back around to itself.

Continue to study how the relationship of stocks, bonds, commodities, and the Dollar (currency) plays out and shifts over time – in so doing, you may find trading opportunities (or confirmation) you didn’t consider previously!


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