Newbies to trading often wonder why the US dollar affects the prices 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 that are stored by central banks and major financial institutions in very large quantities. These currencies are used for major investments, mega transactions, and all aspects of the global economy.
The US dollar is one of the most important reserve currencies in the world. It is widely known for its liquidity and is the US currency, one of the strongest and most stable economies in the world. Commodities are usually priced in reserve currencies. Gold, oil, steel, platinum and many more are priced in US dollars. Oftentimes, commodity buyers use the US dollar to purchase various items. Thus, a sudden change in the dollar price can significantly affect a number of commodities on the market.
Commodities and the US dollar have an inverse relationship. If the price of the dollar goes up, the price of commodities goes down, and if the price of the dollar goes down, the price of commodities goes up. An increase in the value of the US dollar indicates that a buyer will have to spend more of his own currency to purchase a certain amount of a commodity. When the goods become more expensive, the demand for them will fall causing the price to fall.
Each commodity has its own characteristics. Often these attributes affect the prices of various commodities. But the value of the dollar has a great influence on the prices of commodities as compared to the various attributes of the commodities. Even history has its testimony with the inverse relationship between the US dollar and commodities. In 2014, a large number of commodity prices fell when the value of the dollar rose by about 23%.
As a trader, it is always important to keep an eye on the price of the dollar and even the aspects that will affect its price. Commodities and the US dollar are known to move in opposite directions. This insight does not guarantee a specific investment decision but it can guide you in making reliable decisions.
Another reason for the dollar’s impact is that commodities are global assets. They trade all over the world. Foreign buyers buy US goods such as corn, soybeans, wheat, and oil with dollars. When the dollar falls in value, they have more purchasing power because it takes less of their currency to buy every dollar.