Pricing commodities in US Dollars ensures that the three factors mentioned above are all reflections of the trend in commodity markets. Growth differentials are due to commodity strength, which flows to interest rate differentials, and which finally results in capital flows.

When commodities are weak, the US Dollar is strong as producer economies underperform. They then set interest rates lower, and lose capital to the US safe haven. US Dollar based borrowing in these countries will sometimes precipitate a crisis at the same time as a strengthening US Dollar makes it harder to repay loans.

The timing of the bottom of the US Dollar may not be important when considering the long-term view. However, the absolute high in the US Dollar could be set at the time of the peak of the current Fed hiking episode, which will not be when the last interest rate hike is completed, but when US economic growth starts to turn downwards.

At the quarterly to annual scale however, the factors to price moves become more obvious.

The key factors are:

• GDP growth differentials;

• Interest rate differentials; and

• Capital flows

The Yuan is intentionally weakened to encourage growth. This will usually come with other growth measures that involve credit expansion, fixed asset investment and thus commodity consumption. The US Dollar, as a free-floating currency, doesn’t have the luxury of being managed against a broader national goal.

Interestingly, it’s the lack of an open

Whether you credit Paul Volcker for breaking inflation through aggressive monetary policy tightening, or a fall in oil prices due to abundant supply in the early ‘80s, by 1980 the 10-year run in commodities was over, as so was the weakness in the US Dollar.

You might be wondering why this period is the weakest for illustrating the link between commodities and the US Dollar. In this cycle the GSCI index is affected by its construction by having a lower weight in oil, the key seaborne commodity at the time. This has an impact because the ‘80s was a rare period in which energy and non-energy commodities

It is interesting that this run up in commodity prices over this 10 years from is still smaller than what happened between 1971 and 1980 during the period of the Great Inflation. In the ‘70s, commodity prices grew twice as much in roughly half the time. This says something about the supply side response by producers to the most populous nation in

When commodities are strong, the US Dollar is weak as producer economies outperform the US. Due to this, they set interest rates higher, and strongly attract capital away from the US.