US Dollar DX
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Started by metmike - July 27, 2020, 10:39 a.m.

Has broken out very decisively to the downside.

This will continue to put upward pressure on the price of commodities.

By metmike - July 27, 2020, 6:55 p.m.
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The falling dollar is the biggest underappreciated, unreported event of the last couple of months.

The gold rally can directly be attributed to weakness in the US dollar. A couple of charts can explain this best.


The daily chart of the Dollar Index (DXY) needs no explanation. It is evidently weak with every possible zone taken out on the downside. More insights can be derived from the weekly chart below.


The weekly chart above shows that after a sharp rally in 2014-2015, which took Dollar Index from 76 to 100, it has been in a massive sideways move over the past five years. It suffered two failed breakout and two failed breakdowns with neither of them triggering in any change of trend. In a large-ranged movement, we also see a mildly upward rising channel is breaking down in between. During these times, the RSI continuously had a bearish divergence while making lower tops.

By metmike - July 27, 2020, 7:02 p.m.
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How the Dollar Impacts Commodity Prices

There's normally an inverse relationship between the value of the dollar and commodity prices. The prices of commodities have historically tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.

This is a general rule and the correlation isn't perfect, but there's often a significant inverse relationship over time.

If you look at a chart of the Commodity Research Bureau (CRB) Index, it tracks a diverse group of commodity prices against a chart of the dollar index. This represents the strength or weakness of the U.S. currency against other foreign exchange instruments.


  Why the Movement?  

The primary reason the value of the dollar influences commodities prices is that the dollar is the benchmark pricing mechanism for most commodities. U.S. currency is the reserve currency of the world. The dollar tends to be the most stable foreign exchange instrument, so most other nations hold dollars as reserve assets.

When it comes to international trade for raw materials, the dollar is the exchange mechanism in many if not most cases. When the value of the dollar drops, it costs more dollars to buy commodities. At the same time, it costs a lesser amount of other currencies when the dollar is moving lower.


  Commodities Are Global Assets  

Another reason for the influence of the dollar is that commodities are global assets. They trade all over the world. Foreign buyers purchase U.S. commodities such as corn, soybeans, wheat, and oil with dollars. When the value of the dollar drops, they have more buying power because it requires less of their currencies to purchase each dollar. Classic economics teaches that demand typically increases as prices drop.


  The Dollar Is the Benchmark Because It's Stable  

Commodities don't trade in a vacuum. Commodity production is often a localized affair. The majority of corn and soybean production in the world comes from the fertile lands of the U.S. The mineral-rich soil of Chile yields the largest output of copper on earth, and half the world’s oil reserves are located in the Middle East. The largest producers of cocoa beans are in Africa in the Ivory Coast and Ghana regions.

As you can see, commodity production depends on climate and geology in specific locations. But the people and companies that want these important raw materials are located all over the globe.

The vast majority of these materials use the dollar as a pricing mechanism for global trade because of the United States' strong, stable economy. When the dollar strengthens, it means that commodities become more expensive in other, nondollar currencies. This tends to have a negative influence on demand. And as you would expect, when the dollar weakens, commodity prices in other currencies drop lower, which increases demand.


  The Effect on Commodities  

Each commodity has idiosyncratic characteristics, but the value of the dollar has historically had a direct influence on the prices of all commodities. When the dollar began to strengthen in May 2014, the U.S. dollar index traded to 78.93 on the active month futures contract. In early March 2016, that dollar index was trading around the 97 level; the dollar had appreciated by around 23 percent in less than two years. 

Many commodity prices moved lower over this period—a perfect example of the inverse relationship between the value of the dollar and commodity prices. Historical relationships can serve as a guide because history tends to repeat itself, but there are times when major divergences occur so it's possible that commodities prices and the dollar can occasionally move in the same direction.  

By metmike - July 27, 2020, 7:06 p.m.
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This is the lowest value in 2 years. 

It's helping a great deal to make our ag products cheaper and contributing to the amount of sales recently. 

By cutworm - July 28, 2020, 9:28 a.m.
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By cutworm - June 10, 2020, 9:58 p.m.

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The US$ is now 96.08 and falling. Should it break through support at 94.65, it would be bullish most commodities. Change is in the wind. JMHO 

By metmike - July 29, 2020, 2:58 a.m.
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Great call cutworm!

Also great for potential future demand!