December 20, 2016
A Dynamic Commodities Exclusive
The United States is the richest nation on earth and it has the world’s biggest economy. The U.S. currency, the dollar, is the reserve currency of the world because of its stability. Therefore, many central banks and governments hold dollars as critical reserve assets.
The value of the dollar moves higher and lower over time as a result of economic conditions in the United States and around the world. The movement in value of the dollar versus other foreign currency instruments such as the euro or yen is often the result of interest rate differentials. When interest rates in the U.S. are higher than in Europe and Japan, the dollar tends to move higher against the currencies of those nations, it takes fewer dollars to buy those other currencies. Other factors such as political change, macroeconomic trends and other exogenous events can affect the path of least resistance for the dollar against other foreign exchange vehicles.
When it comes to commodities prices, there tends to be an inverse relationship between the value of the dollar and raw materials. When the dollar gets stronger, commodities prices tend to move lower. When the dollar weakens, they tend to rally. While this is a generalization, the dollar’s impact on commodities prices cannot be understated.
Since the dollar is the most influential currency when it comes to global markets, it sits on a throne by itself in the world of foreign exchange instruments. The dollar has been moving higher since May 2014 and the ascent of the dollar against other currencies around the world has put the king of currencies back on top of the world once again.
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