Dollar and Commodities Inverse Relation: What’s Next?

Dollar and Commodities Inverse Relation fxcommentTo forecast future movements with regard oil and gold, it is important to take into consideration the inverse relation between commodities and the U.S. dollar.

Crude oil prices tumbled nearly 55 percent from July 2014 till the end of March 2015, when the prices fell from a peak of $106 a barrel to a low of $43.57.

During the same period, the dollar climbed nearly 24 percent, where the dollar index rose from a low of 79.76 to hit a high of 100.37.

Although the fall in oil prices was more than double the advance in the dollar, due to the presence of other factors related to the supply and demand, the impact of the dollar was clear on crude prices.

However, it seems that the supply and demand factors at the mean time have more weight on the oil’s movements that the dollar.

In May, the dollar surged 2.13 percent and oil advanced 0.8 percent, while the green currency dropped from the beginning of this month until June 19 around 2.72 percent and crude oil dropped 0.8 percent.

Both are moving in the same direction as the oil prices have found a ceiling to its recent rebound due to ample oil supply in the market.

With OPEC producers holding their production quota despite excess supply, oil prices are not capable of taking advantage of the dollar’s recent drop.

The rise in prices encourage high-cost producers in the U.S. and North Sea to increase their production as they can generate higher profit.

On the other hand, demand from major economies, especially China, is still weak as they struggle to find the correct recovery path.

In general, demand on commodities showed some volatility over a month period, where it signaled a downside movement since June 10.

The S&P GSCI commodities index fell from 447.24 on June 10 to 431.55 on June 19, while the Thomson Reuters Jefferies CRB Index, a benchmark of 19 commodity futures contracts, dipped from 228.28 to 222.12 during the same period. Interestingly, the dollar plunged 0.9 percent from June 10 to June 19.

What about Gold?

Gold edged up 1.6 percent last week as the dollar slipped 0.86 percent after the Federal Reserve hinted that the interest rate rise would be slower than expected. A week before, gold increased 0.9 percent and the dollar dropped nearly 1.45 percent.

The shiny metal fell 10.87 percent from July last year to March 2015, while as mentioned previously the dollar soared 24 percent during the same period.

By comparing the drop in oil and the one in gold, it looks that the inverse relation between dollar and gold is stronger, as it seems that other factors are affecting oil prices.

Investors have left safe haven gold with some signs of progress in the U.S. and other major economies, where the advance in corporate earnings increased the appeal of stocks.

The weak physical demand from China and India has kept the downside pressure on gold prices.

If the selling continue in the dollar, the yellow metal may resume its rise, noting that the precious metal could benefit from the slow rise in interest rates by the Fed.

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Ahmed Mamdouh

Ahmed Mamdouh, Co-Founder and Head of English Fundamental Analysis at, with 7 years of experience in the financial markets. Mamdouh holds a Master’s Degree in Economics from The American University in Cairo and a Bachelor Degree in Economics from The Faculty of Economics and Political Science, Cairo University.

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