Exchange rates

How do fluctuating exchange rates impact commodity prices? Below, you find a brief explination.

Commodities, a significant merchandise trade

Commodities account for a quator of merchandise trade, which again accounts for a quator in world GDP. Since many developing countries depend on the export of merely a few commodities, it is important to understand the effects of exchange rate deviations on commodity pricing.

Most commodities are traded in US Dollar ($)

Lets face it, the major commodity exchanges are American, such as Chicago Board of Trade (CBOT), CME Group, ICE and New York Mercantile Exchange (NYMEX).

Commodity buyers and investors turn to those exchanges to get prices, all quoted in dollar. Therefore, exchange rate movements against the dollar affect the prices for importers and exporters of commodities.

What about commodity prices if USD depreciate?

Let us take a general depreciation of the dollar, which increase the dollar denominated commodity prices. The reason behind is that other countries demand a higher price in return for the exchange rate loss. So if USD continue to fall during 2010 against other major currencies, commodity prices will remain high or even further increase in the near future. On the other hand, an appreciating US Dollar and a higher supply would tend to mean-revert commodity prices to the long-term equlibrium level, which in theory is the cost of production.

Read more about the basics behind other macro-economic factors influcencing commodity prices.