Weak USD, Rising Inflation Could Support Commodity ETF Outlook

As the economy expands and pushes up inflation expectations, investors may consider diversifying a traditional portfolio mix of equities and fixed-income assets with commodities and related exchange traded funds.

“Jerome Powell’s recent comments have sparked further market volatility, as investors face the potential of a fourth rate hike in 2018. Powell has expressed support for gradual monetary policy normalization, and despite the US dollar’s spike to a 5 ½ week high, the currency still faces uncertainty. Fed tightening, rising interest rates, and inflation have pushed investors towards asset classes that have historically hedged against rising inflation – particularly commodities,” Maxwell Gold, director of investment strategy at ETF Securities, said in a research note.

Supporting the current commodities outlook, a weak U.S. dollar has contributed to strength in the raw resources market as most commodities are priced in USD. The markets have attributed the recent bout of weakness in the greenback to the U.S. deficit, which has been exacerbated by the passage of the recent tax reform bill and expected fiscal spending plans out of the Trump administration.

“Overall this pick up in deficit spending paints a less rosy medium-term outlook for the US dollar,” Gold said.

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Furthermore, the ongoing economic recovery and positive growth outlook in foreign markets may drive investment demand to those markets, strengthening the local currencies of foreign markets at the expense of the U.S. dollar.

Meanwhile, some have interpreted the weakness in the U.S. dollar as rising inflation – a depreciating currencies means the spending power of consumers and investors also diminish. Current market expectations for U.S. inflation has also increased to over 2.1% from 1.7% in 2017.