Beginners to trading often ask why the US dollar affects the price of many commodities in the market. To answer this question, it is important to first understand what a reserve currency is.
Reserve currencies are currencies stored by central banks and major financial institutions in very large quantities. These coins are used for large investments, massive transactions, and all aspects related to the global economy.
One of the world’s most notable reserve currencies is the US dollar. It is widely known for its liquidity and is the currency of America, one of the most powerful and stable economies in the world. Commodity prices are generally quoted in reserve currencies. The price of gold, oil, steel, platinum and many others are quoted in US dollars. Commodity buyers often use the US dollar to purchase various commodities. Therefore, a sudden change in the price of the dollar can widely affect a number of commodities in the market.
Commodities and the US dollar have an inverse correlation. If the price of the dollar goes up, the price of raw materials goes down and if the price of the dollar goes down, the prices of raw materials go up. An increase in the value of the US dollar indicates that the buyer will have to spend more of his own currency to buy a given amount of a commodity. When commodities become more expensive, their demand will fall, causing prices to fall.
Each commodity has its own peculiar attributes. These attributes often affect the price of various commodities. But the value of the dollar has a superior influence on commodity prices compared to different commodity attributes. Even history has its testimonials with the inverse relationship between the US dollar and commodities. In 2014, a significant number of commodity prices fell when the dollar appreciated by approximately 23%.
As a trader, it is important to always monitor the price of the dollar and even the aspects that will affect its price. It is common knowledge that commodities and the US dollar move in opposite directions. This information does not guarantee a specific investment decision, but it can serve as a guide to making reliable decisions.
Another reason for the dollar’s influence is that commodities are global assets. They trade all over the world. Foreign buyers buy American staples like corn, soybeans, wheat, and oil with dollars. When the value of the dollar falls, they have more purchasing power because they require less of their currencies to purchase each dollar.