Dollar index has noticed terrific movements. The perfect time to sell commodities! Does this thumb rule always works? Well, let’s find out the myths and facts …
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The USDX is a trade-weighted basket of the US dollar versus other major currencies. Sometime volatility in dollar index can be attributed to the major movements in other currencies. Here lets go with an example.
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USDX has seen around 23% rise in just over 4 months. It was the biggest move the USDX has ever made over such a short span in this index in entire history! For this the strength of USD is not counted rather the weakness of other major currencies amid some improvement in US data’s are taken into consideration. At the same time, commodities could not see steep fall in the prices due to seasonality. It happens many times. Yes, I agree that dollar index give impact on the prices, sooner or later, but, remember, as a secondary driver not as primary.
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Return Of Various Commodities and Dollar Index From 2000-2010(In %age)
Chart 1 reveals the secondary nature of the dollar’s role in commodities prices. During the secular bull run between 2000 to 2010, commodities gave incredible performance. It gained between the wide ranges of 64% to 410%. On the contrary, dollar index lost around 23%. It is showing that supply and demand far outweighed the dollar.
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Let’s find another answer to the question. Why to watch dollar index while trading in commodities? What psychological impact does dollar index have on commodity?
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It is in fact very complicated to synthesize fundamentals into tradable whole as in many commodities credibility of data is questionable and data comes on wide intervals. Other factors that give impact on the prices are not easily reachable to all traders. It is also true that commodities fundamentals develop gradually and cannot change overnight and thus it is unable to give massive moves in a short span of time. Many times price movements in commodities is sentiment news driven.
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Here dollar index gain importance, as transaction of many commodities are done in terms of USD worldwide, hence any fluctuation in USD gives significant impact on the commodity prices. Moreover, the dollar’s levels are always available in real-time and consequently it is uncomplicated watching the movements of USD to game commodities rather than exploring into their fundamentals. However, we also cannot deny that in a particular period dollar index becomes the primary driver of commodity.
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Price movements of CRB and Dollar index (2000-2010)
Source: SMC Chart 2
Chart 2 is showing negative correlation between USDX and CRB but percentage of volatility is more in CRB. Even in 2009, CRB recovered by whopping 20% whereas dollar index only fell by 5%.
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As on whole USDX has proportionately negative correlation with commodities but it is not the main driver. Nevertheless, sometime relationship between dollar index and commodities are positive. For example; in the time period of December 1998 to September 2000 relationship between crude oil and USDX was positive for a long period. Many times commodities and USDX move in similar direction in perception of the health of the global economy. Fear and uncertainty surrounding the global economy stimulate safe haven buying in both.
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