Beginners in trading, are often asked why the US dollar has affected the price of many commodities in the market. To answer this question, it is important to first understand what a reserve fund is.
The funds provided are the funds held by the Central Banks and major financial institutions in large quantities. These currencies are used for principal investments, multiple transactions, and all aspects related to the global economy.
One of the most famous reserve currencies in the world is the US dollar. It is largely known for being liquid and it is the currency of America, one of the strongest and most stable economies in the world. Commodities are usually priced in the monies provided. Gold, oil, steel, platinum and many more are priced in US dollars. Typically, commodity buyers use the U.S. dollar to purchase a variety of commodities. Thus, a sudden change in the price of the dollar can greatly affect many commodities in the market.
Commodities and the US dollar have an opposite relationship. If the dollar price increases then the price of commodities falls and if the dollar price decreases then the prices of commodities go up. The rise in the value of the U.S. dollar indicates that buyers have to spend more of their own money to buy a certain amount of a commodity. The more expensive the commodities the lower the demand resulting in a decrease in price.
Each commodity has its own unique characteristics. These qualities often affect the price of various commodities. But the value of the dollar has a greater influence on commodity prices compared to the different characteristics of commodities. Even history has evidences with the reciprocal relationship between the U.S. dollar and commodities. In 2014, a significant number of commodity prices fell when the dollar appreciated by almost 23%.
As a trader, it is important to constantly monitor the price of the dollar and even the aspects that affect its price. It is commonly known that commodities and the US dollar are moving in opposite directions. This perspective does not guarantee a specific investment decision but it can guide making reliable judgments.
Another factor in the influence of the dollar is that commodities are global assets. They sell all over the world. Foreign buyers buy U.S. commodities such as corn, soybeans, wheat, and oil with dollars. If the value of the dollar falls, they have more purchasing power because it takes less of their money to buy every dollar.