US dollar appreciation won’t necessarily put downward pressure on commodity prices

US dollar appreciation won’t necessarily put downward pressure on commodity prices

BAKU, Azerbaijan, Feb.18

By Leman Zeynalova - Trend:

US dollar appreciation won’t necessarily put downward pressure on commodity prices, Trend reports citing UK-based Capital Economics research and consulting company.

“Our forecast for the US dollar to remain strong in 2020 suggests downward pressure on commodities prices. However, we would argue that there are instances when commodity prices can still rise - despite an appreciating US dollar - if the global macro-economic backdrop is sufficiently positive for demand,” reads the report released by Capital Economics.

As the company said, a stronger US dollar is usually associated with falling commodity prices.

“The theory goes that as most commodities are priced in dollars, they become more expensive in local-currency terms as the dollar appreciates and thus the price has to fall to prevent a loss of demand. Producers may also be more willing to accept lower dollar prices if (as is usually the case) their costs are in weakening currencies. Obviously, this process takes time, but given that the presence of a strong inverse relationship is now so ingrained in the minds of investors and traders, there is a certain self-fulfilling element.”

However, Capital Economics suspects that much depends on what is driving the US dollar strength.

“In particular, if the global economy is showing signs of a US-led recovery, we would expect both the US dollar and commodities prices to be rising. This is not dissimilar to our current macro-economic forecast.”

“It is also worth noting that we are not forecasting a significant appreciation of the dollar in 2020. Indeed, the dollar will probably fall back from current virus-related highs later in the year. After all, on a real trade weighted basis, it is trading well nearly 10 percent above its long-term average. In addition, the “twin deficits” (US fiscal and current account) may start to act as a cap on dollar strength, particularly if fiscal policy becomes even looser after the 2020 elections.”

Pulling all this together, the company does not think its forecast of a small appreciation of the US dollar in 2020 will prevent some recovery in commodity prices later in the year.

“Instead, prices should rise on the back of a gradual revival in global economic growth, most notably in the commodities-intensive manufacturing sector, at a time of relatively constrained supply of industrial commodities.”

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