A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

September 22, 2014

Ripple FX: the surging dollar
DXY Dollar Index and Bloomberg Commodity Index

chart

Source: Bloomberg, as of 9/16/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The dollar has surged against major currencies since the end of June, with spot prices (as reflected in the DXY Dollar Index) up 5.3% to the highest level in over four years.
  • Meanwhile, the Bloomberg Commodities Index has dropped 9.3% over the same period—to its lowest level since mid-2009.
  • The most obvious explanation for both moves is the euro's recent slide against the dollar. Expectations for more aggressive easing by the European Central Bank (ECB) have weakened the appeal of the euro (which accounts for nearly 58% of the DXY Index) to the benefit of the dollar.
  • In general, a stronger US$ translates into weaker commodity prices—by convention, commodities are priced in US$ terms—and so the more the dollar rises, the fewer dollars are needed to buy commodities, pushing down prices.
  • Yet the ECB and the euro aren't the whole story: other factors include the potential for a Federal Reserve (Fed) rate increase next year, shifts in expected growth rates between the US and other countries, inflation expectations, geopolitical anxieties, and more.
  • Clearly, the driving forces behind currencies and commodities prices are complex. A confluence of factors, some short-term in nature and others part of larger trends, underscore the need for expertise when seeking opportunities in these markets.

The chart:

  • The chart shows the DXY Dollar Index and the Bloomberg Commodities Index over the past five years.
  • The relatively sharp increase in the DXY over the past three months is part of a longer-term trend of gradually strengthening that's been taking place since it most recent low in April 2011.
  • The notable decline in the Bloomberg Commodities Index over the past three months is part of a longer-term trend of weakening; the most recent high for the index also occurring in April 2011.

Context & Perspective:

  • The trends toward a stronger US$ and weaker commodity prices are not new. The US$ has been strengthening—albeit gradually—against major currencies for several years now and commodity prices have been declining more quickly and for longer. The DXY is up 15% from its most recent low in April 2011 and the commodities index is down 30% from its most recent high that same month—and down nearly 50% from its all-time high in June 2008.
  • The DXY Dollar Index is heavily weighted in euros, so moves in that currency alone can have a large impact on the index, but the US$ also strengthened relative to the majority of the world's currencies since the end of June—something that would not be reflected in the DXY as that index only includes the euro (57.6%), Japanese yen (13.6%), Canadian dollar (9.1%), British pound (11.9%), Swedish krona (4.2%) and Swiss franc (3.6%).
  • During the first decade of this century strong commodities demand from China and other developing nations, coupled with supply constraints to push prices sharply higher. In addition, expectations that this heightened demand would continue lifted prices even more. More recently, these expectations have been scaled back even as more supply of certain commodities has come to market, all putting downward pressure on prices.

Definitions:

The DXY Dollar Index measures the value of the U.S. dollar relative to the exchange rates of six major world currencies (the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc) which represent a majority of its most significant trading partners.

The Bloomberg Commodities Index, formerly known as the Dow Jones UBS Commodities Index, is calculated on an excess return basis can composed of futures contracts on 22 physical commodities.

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.


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Currencies and ommodities contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

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