The U.S. dollar had a strong showing in 2014 relative to other major currencies. It gained about 5% against the euro and also strengthened against the British pound and Japanese yen, among others.
That may be welcome news to U.S. consumers. A strong dollar lowers the cost of imported goods and gives Americans more buying power when they travel overseas.
But a strong dollar isn’t so positive for commodities—basic physical goods such as metals, food and oil. Commodity prices tend to move in the opposite direction of the dollar. So when the dollar gains against other major currencies, commodity prices typically fall. Some commodities are more sensitive to the dollar’s changing value than others. Precious metals, agriculture and energy have all tended to move in an inverse direction to the dollar over the past 20 years.
What’s behind this relationship? About 80% of the world’s globally traded commodities are priced in U.S. dollars—the world’s reserve currency. When the value of the dollar increases, it takes fewer dollars to buy commodities, which pushes down prices. In addition, a stronger dollar curbs the buying power of commodity buyers in countries with weaker currencies, which can hurt overall demand—further depressing prices.
Investors interested in commodities or commodity funds would do well to pay attention to the dollar.