Amongst the chaos of slowing economies and recession fears, volatile stock markets, increasing oil prices etc.., Dollar is gaining popularity and momentum.  So, how much of the increase in prices of commodities and products are impacted by the strong dollar? By Komal Motwani, CFP®

Dollar is continuing to hold its strength as investors flock to the putative safety of the currency amid global recession concerns. The other reason that has caused the dollar to advance is the hawkish Fed and their determination to bring the four-decade high inflation down by increasing the Fed funds rate. Higher interest rates lead to an increase in investments. Where countries such as Japan still have a dovish stance on the monetary policies, U.S. is an attractive market for income / yield generators. 

In contrast, the Euro in recent trading sessions slumped to its lowest in 20 years due to concerns that the European Central Banks may not be able to raise the rates to tame inflation (annual inflation in Euro area increased to 8.6% in June of 2022). Though in June, 2022 meeting ECB confirmed its intention to hike key interest rate in July’s meeting by 25 bps.  

Euro continues it’s decent toward parity with the dollar amidst recession fears. Dollar is also continuing to rise against Japanese Yen and other basket of currencies. 

While a strong dollar stands positive for U.S. imports, it is not quite beneficial for the exports. Emerging market economies are adversely impacted as well due to dollar peg, higher foreign currency payments and higher cost of goods and services.  Commodities are usually priced in USD. Gold, Oil, wheat, corn and other metals trade in U.S. dollar. A surge in USD makes commodities more expensive. Today, we are facing unprecedented global issues around the globe. War in Ukraine, Covid Pandemic, supply chain disruptions, food shortages and climatic changes are a few to name. The global shortages and sanctions have led to the commodity prices to work in tandem with the increase in dollar. Whereas in a normal scenario the increase in USD should hurt the demand and commodity prices.  Conventionally, dollar strengthening must move the commodity prices lower and increase the purchasing power (somewhat an inverse relationship). Technically, a strong dollar should be a problem for oil markets. Historically, tightening cycle in the US has likely resulted into strengthening of a dollar. 

In current market scenarios, Gold, for example has not been able to provide a good inflation and recession hedge, and one of the reasons being a strong dollar. Gold is denominated in the U.S. Dollars and during times of geopolitical turmoil’s, gold is considered to be a safe haven. 

The recent ban on Russian Gold imports technically should have benefited the gold prices. Gold is an asset and hence other factors such as demand also impact the intrinsic value of the commodity.  However, compared to other commodities, Gold is still not trading as volatile and can be perceived as a recession hedge with a small allocation in a diversified portfolio.