Generally speaking, the price of oil, and commodities overall, move in the opposite direction of the US dollar. When the greenback spikes, the price of oil and materials needed by industries as well as certain food staples normally drop. This makes sense since the dollar can buy more stuff due to higher confidence in the US economy which animates the value of the dollar. On the other hand, when the dollar drops, the price of commodities usually increase since it takes more dollars to buy these items. In times of dollar declines, markets ‘store’ value in commodities or competingcurrencies. Keep this in mind when mapping out the effects of the European Central Bank’s quantitative easing on the global economy.
Cheaper euros mean stronger dollars
The greenback recently hit the 1.14 USD to 1 euro mark. The dollar hasn’t been this strong against the Eurozone currency in years. This should be expected since the ECB’s decision to print up an estimated 1.1 trillion euros will water down the value of the shared European currency. This boosts the US dollar’s strength. Since Japan is also devaluing its currency through its own quantitative easing, the US is surging in the US-JPY trade as well.
Where does this all leave us? As mentioned above, when the US dollar surges, commodities decline. Barring a quick global recovery, expect the downward trend in commodity prices to continue. Keep in mind that commodities don’t automatically follow oil’s lead. It’s only been recently that all nine major commodities are trading lower jointly. This is relatively rare. Usually, some commodities will be trending up while others are neutral or trending lower.