Can commodity survive a stronger US dollar?

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Alastair Baker and Patrick Brenner, Multi-Asset Investment Fund Managers at Schroders, share their latest insights, focusing on the relationship between the US dollar and commodity prices:

Conventional wisdom is that the US dollar has a strong influence on commodity prices. The explanation for this relationship is that since commodities are priced in dollar terms, then commodity prices must move lower when the dollar strengthens to reflect its increased purchasing power.

After the 2008 global financial crisis there has indeed been a very strong inverse relationship between commodities and the US dollar.

However, this has not always been the case. Prior to the financial crisis, the correlation was much less obvious. For example, during the boom years of the 1990s there was almost no relationship between the US dollar and commodity prices. Then, in the recovery after the dotcom bubble bursting from 2003-2006, the relationship weakened again.

We therefore reject the gross simplification that all you need to know to have a view on commodities is the direction of the dollar. It does, however, help if you can identify which type of dollar environment you are in.

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