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Will Weakness in the Dollar be a Tailwind for Commodities?

Glenn Wachtler
Educational Opportunities: 
Grain, Young, Beginning Farmers, Women in Ag
Home > Education & Events > August 2017 > Will Weakness in the Dollar be a Tailwind for Commodities?

Since the beginning of 2017 the U.S. Dollar index has been consistently falling. The fall of the dollar is blamed on diminishing hopes that economic policies will be changed to help strengthen the U.S. economy. The U.S. was one of the first economies to recover from the great recession and the dollar index increased dramatically as employment grew and the economy improved. As of late, however, growth has been slowing — especially compared to other parts of the world just recovering now.

What does the weaker dollar mean for commodities?
Typically the U.S. dollar and commodities have an inverse relationship, meaning weaker dollar helps U.S. manufactured goods and dollar-priced commodities compete on the world market. However, 2017 has been an exception. The U.S. dollar is declining and so are commodity prices, as measured by most major indexes. The weakened dollar is not providing the spark needed to wake up sleepy commodity prices.  
Is the historic inverse relationship between the USD and commodities broken?
There is very little chance that we are seeing a permanent break-down in the relationship between commodity prices and the dollar.  Instead, it’s likely that intervention in monetary policies by Central Banks around the world were responsible for much of the volatility in the currency prices.  Market forces will win out; either the economies of the world will be strong enough to grow without currency help from their central bank, or the market will eventually discount continued central bank action as time goes on and policies start to lose their effectiveness.
What to do?
Over the past several years, you would have been well positioned if you were using the USD index as one of the factors when deciding how aggressively to hedge. The recent commodity markets may have left you with the feeling that it is impossible to execute a profitable hedging strategy because the trend for commodities prices has been down. If you missed opportunities this year, be diligent about leveraging any short term bounces in the market to catch up on sales, reducing the risk of a further decline in prices. Also, keep one eye on the direction of the dollar for a clue to help with the your long-run hedging strategy.
Glenn Wachtler is a Senior Lending Officer with Compeer Financial, a Farm Credit System institution. For more insights from Glenn and our other experts, sign up for our production agriculture e-Newsletter.
Compeer Financial
Dave, this is Glenn the author of this article. I appreciate you reaching out, that is a great question. Due to the importance of the price of the dollar when it comes to commodity trading it doesn’t surprise me that the vendor on the farm may have been interested in the recent decline and future direction of the U.S. dollar. Without knowing specifics, it is hard to say for certain. However, traders that work in currencies frequently use technical analysis and price charts to guide them and it could be that the information provided by the vendor was based on information using one of those systems. Hope this helps!
10/11/2017 1:27:45 PM
Dave Brutscher
A vendor visited the farm today and was certain the dollar was going to 82, followed by a rise to 142 with a corresponding decline in US Ag, where do you suppose he got this?
10/10/2017 5:15:15 PM
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