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Many commodities are prices in US dollars. If the Dollar strengthens, then commodities (in non-US countries) will become more expensive. From the consumers' (suppliers') point of view, this should be a move along the demand (supply) curve, not a shift since nothing has inherently changed in their demand or supply of the actual commodity. For a stronger dollar, a consumer will simply demand less.

Then why is it that a strong US dollars is highly correlated with low commodity prices? Is the efficient market adjusting to pre- strong dollar levels?

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  • $\begingroup$ Low prices in what currency? $\endgroup$ – Giskard May 6 '15 at 11:14
  • $\begingroup$ @denesp low prices in US Dollars. $\endgroup$ – Nox May 6 '15 at 14:40
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Most global commodities are quoted (priced) in US dollars. The more valuable a dollar becomes relative to other currencies, all other things equal, the more commodity prices have to fall to equilibrate. Imagine everything was priced in corn and people start to value corn more or the amount of corn falls. Either way, all the prices in terms of corn (e.g. ears per barrel of oil) would have to fall as a result.

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What happens if the demand for something falls?

The price falls.

So, you have two different effects. 1) An increased dollar value and 2) A decreased demand. The dominating effect will tell you about the overall price movement.

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  • $\begingroup$ Do you actually have a decrease in demand though? When the price of something increases, the amount demanded at that quantity will be lower. But demand itself hasn't decreased. $\endgroup$ – Nox May 6 '15 at 14:44

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