Commodities “Trump” the U.S. Dollar

Since November 7th, the day before the historic presidential elections, commodities have rallied approximately 5%(1). During that same period the U.S. Dollar has increased approximately 6%(2)! While this may puzzle some investors, it is not as unusual as commonly thought. Commodities have frequently rallied in the face of a rising dollar particularly when demand and supply conditions are out of balance as they are today. Commodities have also rallied recently in part due to optimism about the economy and the potential for infrastructure spending. This new input means demand may be increasing at a time when the supply side has become far more constrained than even two years ago. In addition, since the election both the sharp rise in U.S. interest rates and increased inflation expectations are both positive global macro trends for commodities.

With a number of these factors seemingly lining up in a positive fashion for the commodity asset class, we would caution investors to put too much emphasis on the U.S. Dollar when considering their commodity allocations. And if the optimistic sentiment towards a strong dollar turn out to be disappointing and the dollar actually peaks and begins to weaken: then there would be another positive global macro trend in place that bodes well for commodities. In the meantime, the growing supply-demand imbalance and the turn up in interest rates and inflation expectations may indeed “Trump” any continued dollar strength.

Year to date the U.S. Dollar is up 4.45% and commodities are up 11.87%(3). It looks like 2016 will be another year where commodities rose at the same time the dollar was strong:


Source: Bloomberg. Data as of 12/27/2016.
11/7/16 – 12/27/16 (1)Bloomberg Commodity Index + 4.58%; Rogers International Commodity Index® +6.19%, (2)U.S. Dollar Index +5.94%.
12/31/15 – 12/27/16 (3)Bloomberg Commodity Index +11.87%, Rogers International Commodity Index® +13.30%.
DXY is a weighted geometric mean of the dollar’s value compared only with a “basket” of 6 other major currencies which are: Euro (EUR) 57.6%, Japanese Yen (JPY) 13.6%, Pound Sterling (GBP) 11.9%, Canadian Dollar (CAD) 9.1%, Swedish Krona (SEK) 4.2%, Swiss Franc (CHF) 3.6%. Commodities in the table above are represented by the S&P GSCI TR from January 1980 to July 1998 and the Bloomberg Commodity Index TR from August 1998 to December 27 2016.
Alan Konn

Partner & Managing Director of Price Asset Management