The dollar has been strengthening and is likely to continue to do so. The recent strength in the dollar is not simply a function of an accelerating U.S. economy; it also reflects weakness in other regions. For example, weak European economic data forced the European Central Bank to further lower interest rates and initiate a new program to buy asset backed securities. The effect, as expected, was to push the euro down against other currencies, especially the dollar.
The rally in the dollar is pushing down commodity prices across the board. The S&P GSCI Total Return Index is down nearly 3% year-to-date, with bigger losses in Brent Crude, natural gas and nearly the entire agricultural complex. Even gold, which has benefited year-to-date from the drop in real-interest rates, has lost approximately 5.0% from its July high, including another 1.5% last week.
To the extent that the dollar continues to rise, particularly if real rates start to reverse and move higher, investors should expect commodities to remain under pressure.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.