The Dollar Moves Higher, But …

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How the Dollar Impacts Commodity Prices

The General Rules Might Be Changing

There’s normally an inverse relationship between the value of the dollar and commodity prices. The prices of commodities have historically tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.

This is a general rule and the correlation isn’t perfect, but there’s often a significant inverse relationship over time.

If you look at a chart of the Commodity Research Bureau (CRB) Index, it tracks a diverse group of commodity prices against a chart of the dollar index. This represents the strength or weakness of the U.S. currency against other foreign exchange instruments.

Why the Movement?

The primary reason the value of the dollar influences commodities prices is that the dollar is the benchmark pricing mechanism for most commodities. U.S. currency is the reserve currency of the world. The dollar tends to be the most stable foreign exchange instrument, so most other nations hold dollars as reserve assets.

When it comes to international trade for raw materials, the dollar is the exchange mechanism in many if not most cases. When the value of the dollar drops, it costs more dollars to buy commodities. At the same time, it costs a lesser amount of other currencies when the dollar is moving lower.

Commodities Are Global Assets

Another reason for the influence of the dollar is that commodities are global assets. They trade all over the world. Foreign buyers purchase U.S. commodities such as corn, soybeans, wheat, and oil with dollars. When the value of the dollar drops, they have more buying power because it requires less of their currencies to purchase each dollar. Classic economics teaches that demand typically increases as prices drop.

The Dollar Is the Benchmark Because It’s Stable

Commodities don’t trade in a vacuum. Commodity production is often a localized affair. The majority of corn and soybean production in the world comes from the fertile lands of the U.S. The mineral-rich soil of Chile yields the largest output of copper on earth, and half the world’s oil reserves are located in the Middle East. The largest producers of cocoa beans are in Africa in the Ivory Coast and Ghana regions.

As you can see, commodity production depends on climate and geology in specific locations. But the people and companies that want these important raw materials are located all over the globe.

The vast majority of these materials use the dollar as a pricing mechanism for global trade because of the United States’ strong, stable economy. When the dollar strengthens, it means that commodities become more expensive in other, nondollar currencies. This tends to have a negative influence on demand. And as you would expect, when the dollar weakens, commodity prices in other currencies drop lower, which increases demand.

The Effect on Commodities

Each commodity has idiosyncratic characteristics, but the value of the dollar has historically had a direct influence on the prices of all commodities. When the dollar began to strengthen in May 2020, the U.S. dollar index traded to 78.93 on the active month futures contract. In early March 2020, that dollar index was trading around the 97 level; the dollar had appreciated by around 23 percent in less than two years.

Many commodity prices moved lower over this period—a perfect example of the inverse relationship between the value of the dollar and commodity prices. Historical relationships can serve as a guide because history tends to repeat itself, but there are times when major divergences occur so it’s possible that commodities prices and the dollar can occasionally move in the same direction.

Is Change in the Air?

Citi Research reported in 2020 that the correlation between the dollar and commodity prices became less significant after the dollar index was trading at about 97 just a year before. Specifically, commodities were strong in the latter half of 2020 even as the U.S. dollar gained against other currencies.

It was the most significant variation in the correlation a decade. Citi had indicated that it thought this state of affairs might last for a while. In June of 2020, the US dollar index was at about 97 again, after fluctuating lower during 2020, while many commodities were down for the year.

Monitoring the Dollar

One of the best ways to hedge against change and to keep a close eye on the value of the dollar and its correlation with commodities is to watch the price quotes of the US Dollar Index (ticker: DXY).

This index is traded on the ICE Futures Exchange. This futures contract is an index that values the dollar against a group of other major currencies around the world, including the euro, the yen, and the British pound. The price of the index is traded like any other futures contract, and it moves up and down during trading hours.

U.S. dollar moves higher on Taipei forex market but gains capped

Taipei, (CNA) The U.S. dollar rose against the Taiwan dollar Friday after foreign investors rushed to repatriate their funds out of the country at a time of escalating fears over the global spread of the novel coronavirus disease COVID-19, dealers said.

The U.S. currency ended trading at NT$30.233 noon Friday, gaining NT$0.083 against its Taiwanese counterpart, off a high of NT$30.2900.

Soon after the local foreign exchange opened, the greenback received a boost as investors took their cue to sell the Taiwan dollar from a plunge on the local main board.

The main board fell almost 800 points initially and continued to trade below the 10,000 point mark in the wake of plummeting U.S. markets, where the Dow Jones Industrial Average shed nearly 10 percent overnight amid the virus scare, dealers said.

Dealers said foreign institutional investors scrambled to sell their holdings in Taiwanese equities for funds to meet redemption needs back in their home markets amid the global sell-off.

The weakness of other currencies in the region, in particular the South Korean won, which the Taiwan dollar follows closely, also prompted traders to cut their holdings in the Taiwan dollar, pushing the U.S. dollar to its earlier high, dealers said.

The won fell 3.48 percent against the U.S. dollar at one point, which added downward pressure on the Taiwan dollar throughout the morning session, dealers added.

However, the Taiwan dollar received some support and recouped part of its earlier losses as exporters took advantage of the U.S. dollar’s appreciation to sell the greenback in exchange for more local currency, dealers said.

Dealers said the central bank could step in to maintain market order if trading in the local currency remains volatile.

How U.S. Stock Prices Correlate to the Value of the U.S. Dollar

Comparing the US Dollar Index (USDX), which tracks the value of the U.S. dollar against six other major currencies, and the value of the Dow Jones Industrial Average (DJIA), Nasdaq and S&P 500 over a 20-year period (as of 2020), the correlation coefficient is 0.35, 0.39 and 0.38, respectively. Note that all of the coefficients are positive, which means that as the value of the U.S. dollar increases, so do the stock indexes, but only by a certain amount. It’s also notable that each coefficient is below 0.4, which means that only about 35% to 40% of the stock indexes’ movements are associated with the movement of the U.S. dollar.

A country’s currency can become more valuable in relation to the rest of the world in two ways: when the amount of currency units available in the world market place is reduced (i.e., when the Fed increases interest rates and causes a reduction in spending), or by an increase in the demand for that particular currency. The fact that an increase in the U.S. dollar affects the value of American stocks seems natural, as U.S. dollars are needed to purchase stocks.

The effect of a significant depreciation in the value of the U.S. dollar on the value of an investor’s U.S-based portfolio is very much a function of the portfolio’s contents. In other words, if the dollar declines substantially in value against a number of other currencies, your portfolio might be worth less than before, more than before, or about the same as before – it depends on what kinds of stocks are in your portfolio.

U.S. Dollar Stock Correlation Scenarios

The following three examples illustrate the different potential effects of a declining greenback on an investor’s portfolio:

1. Worst-Case Scenario. Your portfolio is made up of shares that rely heavily on imported raw materials, energy or commodities to make money. A substantial portion of the manufacturing sector of the U.S. economy depends on imported raw materials to create finished goods. If the purchasing power of the U.S. dollar declines, it will cost manufacturers more than it did before to buy goods, which puts pressure on their profit margins and, ultimately, their bottom lines.

Companies in your portfolio that don’t properly hedge against their reliance on the price of imported goods or the effects of a declining dollar can expose you to a lot of foreign exchange risk. For example, a company that makes baseball bats with imported wood will need to pay more for the wood if the U.S. dollar declines. In this case, a lower U.S. dollar will present a problem to the company because it will have to decide whether it will make less money per unit sold or raise prices (and risk losing customers) to compensate for the higher cost of wood.

2. Likely Scenario. Your portfolio is made up of a diverse collection of companies and is not overweight in any one economic sector. You have also diversified internationally and hold stock in companies that operate around the world, selling to many different markets. In this situation, a declining dollar will have both positive and negative effects on your portfolio.

Currencies

William Watts

ICE U.S. Dollar Index logs 0.4% weekly rise

French artist Karl Lagasse holds a bronze dollar bill of his sculpture “One Dollar Bronze.”

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The U.S. dollar just spent another week flexing its muscles. While that hasn’t done much to derail upside momentum for the stock market so far, it’s worth remembering that big moves by the word’s reserve currency can send ripples through global financial markets.

Or, as Martin Enlund, global chief FX strategist at Nordea put it in a Friday research note: “When the dollar moves, things break. And when things break, the dollar moves.”

The ICE U.S. Dollar Index DXY, +0.34% , a measure of the currency against a basket of six major rivals, rose 0.4% this week, trading Friday near 99.074, its highest since early October. The bulk of the dollar’s strength came versus the euro EURUSD, -0.55% , which tumbled nearly 1% this week to its lowest since April 2020, and was changing hands at $1.0843 late Friday.

Enlund noted that in real, trade-weighted terms, the dollar is only 1.6% below its most recent peak from January 2020.

A strong dollar can be a headwind for U.S. exporters and multinationals by reducing their competitiveness versus foreign competitors. It can also slow growth in the rest of the world, Enlund noted.

For example, companies with lots of dollar-denominated loans can see their balance sheets worsen when the dollar rises, which then has a negative impact on business investments. He said the recent strength in the U.S. currency implied a drop in a broad measure of global money supply (in dollar terms) to its lowest level since December.

“Historically, it’s not uncommon to see crises emerge when the USD (U.S. dollar) starts to turn higher. Though one should note that the USD also rises because of crises emerging,” Enlund wrote.

Uncertainty around the scope and impact of the spread of COVID-19, the disease caused by the coronavirus that emerged in Wuhan, China, in late 2020, has sparked occasional selloffs in equities and other assets perceived as risky while boosting traditional havens, such as gold and core government bonds.

But investor appetite for risky assets has largely remained intact, with major U.S. benchmarks pushing to another round of records this week before losing some ground heading into a three-day weekend. The S&P 500 SPX, +2.28% was on track for a 1.4% weekly rise, while the Dow Jones Industrial Average DJIA, +2.24% remained up 0.9% for the week.

“The dollar trends are nonetheless worth watching, no matter what asset class you are focusing on,” Enlund said. “For now we suspect we need more dollar strength to materialize for the USD to significantly dent risk appetite.”

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What will happen in 2020? Will dollar move higher, or will it fall from current prices?

2020 is about to end, and if you read our book 2020 Financial Predictions, then we clearly mentioned that the trading range for Dollar Index would be 99 to 94.55, which has so far proven to be accurate. However, now everyone is asking what will happen in 2020. Will dollar move higher, or will it fall from current prices? What will be the best currency to bet on in 2020.

Brief Outlook of the Euro:

According to the current Astro cycle the higher side will be limited in the Euro, and this will be a very crucial time cycle for traders as the trading range will remain very tight throughout the year. Most of you are aware that I am predicting a great crash in Euro after two years, and we have already mentioned that the Euro is heading back to 0.8300, and there is a possibility that it may go towards 0.5500.

Do not rush take any trades immediately after reading these lower side ranges, however if you are a very long-term player, and your investments are for the longer term then you can plan your strategy in favor of the USD against Euro.

In 2020 we see the Euro trading in the range of 1.1398 to 1.0611. According to the Astro Cycles from the month of May to October 2020, the Euro will fall sharply, so keep this in mind as from January to April the Euro will trade range bound.

Other Frontline Currencies:

I still do not see any major trend in Swiss Franc, Japanese Yen, Australian and Canadian Dollar in 2020. Surely all these currencies will gain some value between the 1 st of February to the 25th of April, and from May to October they will trade negatively. By the end of the year there will be volatility on both sides and we may witness 5% rises and falls in the month of November and December.

Emerging Market Currencies:

There is a reason behind not talking much about the frontline currencies in the above two sections, and that is because I see dramatic changes coming in the emerging market currencies like Brazilian Real, Mexican Peso, Indonesian Rupiyah, Thai Bath, Indian Rupee, South African Rand, Chilean Peso, Turkish Lira, and Argentinian Peso.

I see most of the emerging market currencies gaining at least 15-20% value against the Euro, Pound, Swiss Franc, and Japanese Yen. Of course, they will also gain against the USD, so this will be a very interesting phenomenon that traders will witness in the currency market.

I do not recommend that anyone go short in Emerging Market Currencies. Buy and hold these currencies and I am sure you will be rewarded greatly by the end of 2020. If I am not mistaken in my reading of the Astro Theory, then we shall see the Brazilian Real going towards 3.63 to 2.56 from the current price of 4.12. In fact, last week Dollar hit an all-time high against the Real at 4.26, and if you follow our letters, then over the last two weeks we have been recommending aggressive shorts in Dollar against the Real. At the time we are writing this Dollar/Real is trading at 4.12, and soon we see it trading below 4.00.

Indian Rupee has slowly started gaining value. We called a topping out of Dollar at 75.00. 2020 looks fantastic for the Indian Rupee, even though the economic conditions in the county won’t be that promising. Saturn will surely rescue the Rupee and will push it higher against most of the currencies. If I am not mistaken, then we see the USD/Rupee going to 65.00. The best time for Rupee will be the month of February, and from May to October. Do not short Rupee or buy the Dollar against Rupee during this period.

Our view is also very bullish for the emerging market currencies mentioned above, but one currency I would like to specifically mention is Argentinian Peso. The Peso has been falling continuously due to a sharp rise in inflation and a fall in economic activity. People lost confidence in the Peso, and everyone is trying to convert the Argentinian Peso into Dollar, especially after the election polls indicated that Marci is losing the Election against Alberto. When this news broke out in August 2020, Argentinian Peso lost 35% within 8 hours. Two days ago, Alberto took his oath and promised to restructure a deal with IMF and the Debtors.

I am just waiting for Saturn to change, which will happen on the 24 th of January, because after the 24th of January 2020, the Peso will create history by gaining more than 50% against the Dollar, as well as most of the currencies in 2020. I know it is hard to believe such a big reversal will take place, because no currency expert is expecting this to happen. I do not see Dollar going above 63.00 against the Peso, and I won’t be surprised at all if the Dollar falls to 33.00.

Important note:

I know my letters are very lengthy, but I want to keep this short, and just say that the Wave of Nature is completely in favor of Emerging Market currencies, so I recommend traders to remain focused on Emerging Market currencies. This is a great time to enter all these currencies without fear, and I am sure you will be rewarded greatly in 2020.

I have been writing my view on the currency market for the last 19 years. In September 2001, when I came out with the first currency outlook, in that report we mentioned that Euro will be going from 0.8300 to 1.3950. We also mentioned that dollar will collapse against most of the currencies in a seven-year cycle. At that time Dollar Index was trading around 150.

I was very new to Wall Street during that era, but my predictions were taken very seriously by a few members of the media, and key experts, due to my past track record predicting international events. Slowly the currencies started trading positively against the USD, and most of the currencies remained positive for 7 years.

In 2008 I called a bottom for the USD, and recommended everyone to get out from the Euro, Pound, Australian and Canadian Dollar, as well as Emerging Market currencies. We also recommended selling most of the currencies and buying dollar. These predictions definitely gave us great standing as a predictor of the currency market. The reason behind writing this first, is to give a brief overview of our work to those who are not aware of it.

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