It used to be that commodity prices and the US dollar moved in opposite directions. However, a recent paper released by the Bank for International Settlements, the central bankers’ bank headquartered in Basel, Switzerland, indicates that “commodity prices and the value of the US dollar have recently moved up and down in tandem…they both surged in 2021 and 2022 and subsequently weakened together.” https://www.bis.org/publ/bisbull74.pdf
The authors of the paper B. Hoffman, D. Igan and D. Rees are all staff members of the Basel bank, they describe this new correlation as “a marked departure from the standard pattern, whereby dollar strength goes hand in hand with weaker commodity prices, and vice versa.”
The factors identified to explain this change are both temporary and structural. The surge in commodity prices caused by the war in Ukraine and the flight to safety into the US dollar, together with the monetary policy tightening in the United States, are some of the temporary factors. While a “structural determinant” is the United States turn into a net exporter of oil and natural gas.
The authors also describe some implications, citing evidence that higher commodity prices and dollar appreciation increase the risk of both weak growth and high inflation, compounding the risk of stagflation.
In the long run, the paper concludes this new correlation between commodity prices and the dollar exchange rate could lead to greater volatility and less recycling of petrodollars, due to less fuel imports in the United States.
