Unsettled Times Ahead for the U.S. Dollar and the Potential Impact on Commodity Prices





After more than five years of relatively low volatility for the U.S. dollar, market dynamics suggest that the dollar is gearing up for a larger move. Given the impact on commodity prices, keeping an eye on the movement of the dollar will be crucial to your marketing efforts both in the short and long term.


In which direction is the U.S. dollar headed? The fundamentals are currently in conflict.


During times of U.S. market stability, it’s easy to forget how the U.S. Dollar Index can amplify or weaken commodity prices. Currently, there are a number of factors that speak to either a strengthening or weakening of the dollar. Paying close attention to these factors and how they affect directional changes in dollar chart dynamics will be key to assessing the long-term impact of the dollar on commodity prices.

  • As the U.S. dollar gains strength and the index moves upward, it takes more foreign currency to purchase a unit of commodities, and thus the prices of U.S. commodities rise for the rest of the world. Under these conditions, we would expect to see money flow out of U.S. commodities and put downward pressure on prices for grains, livestock and milk, for example, as money flows elsewhere.

Our hot economy lends itself to a more aggressive outlook for the dollar and the weakening of commodity prices. From a fundamentals perspective, the U.S. remains the strongest globally, which suggests that foreign investments will continue to chase U.S. returns. In addition, the Federal Reserve is poised to tighten U.S. monetary policy by reducing U.S. dollar supply with a resulting increase in the U.S. Dollar Index. The Fed has signaled this policy change primarily via an upcoming tapering of U.S. monthly bond buying. Of concern, inflation may force them to tighten policy even more than anticipated. Over the past five consecutive months, inflation has ranged between 3 and 4.5%. If it proves to be a longer-term vs. transitory concern, the Fed may be forced into a more aggressive tightening to address it.

  • In contrast, a weakening of the U.S. dollar would result in the lowering of the U.S. Dollar Index. The likely impact would be an increase in the price of commodities, as investors seek to stabilize their overall portfolio by investing in commodities. Bear in mind that in addition to an increase in the price of farm production, gas prices would also likely rise.

Fundamental factors supporting a weakening of the dollar and increase in commodity prices are directly related to the continued U.S. infatuation with imbalances in support of our current lifestyle. Both the U.S. debt anddeficit continue on a fast clip as they have since 2008; likewise, the Federal Reserve Balance Sheet continues to grow, and imports are anticipated to exceed exports over the upcoming years. All these factors lend themselvesto an increase of U.S. dollars in circulation and a decrease in the overall price of the dollar.


The direction of the dollar is likely a function of how it breaks the current range.


Prices tend to fluctuate around a range until market factors force a breakout from that range, at which point the next, broader range is tested. In the case of the U.S. Dollar Index, the preponderance of the competing fundamentals discussed above will ultimately play out by how the index breaks out of the current range. Since end of June this year, the U.S. dollar has been trading in a tight 2-point range, largely between 91.78 and 93.73. Since the beginning of 2017, the index has been trading in a wider 15-point range, largely between 88.25 and 103.82. The direction in which the dollar breaks out of the tighter range will likely dictate which side of the larger range will be tested.

For instance, if the dollar breaks over 93.73, then 103.82 would be the next upside objective. In contrast, if the dollar breaks under 91.78, the next downside objective would be 88.25.

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As ranges are broken, bigger ranges are tested and commodity prices will react.


The direction in which the dollar breaks out of the larger range will put into play even more consequential price targets. For instance, 

  • If the dollar breaks under 91.78, and then breaks under 88.25, then a retest of the 2008 record low of 70.70 would be the next objective.
  • If the dollar breaks over 93.73, and then breaks over 103.82, then a retest of the 2001 high of 121.02 would be the next objective.

More broadly, as ranges are broken and bigger ranges are tested, the potential impact on commodity prices grows commensurately. Thus, if we experience U.S. Dollar Index ranges as we anticipate, expect a big impact on commodity prices as well. Based on the potential for testing of multiple ranges, it is imperative to keep a firm and consistent eye on how the U.S. Dollar Index is reacting to the market and actions of the Federal Reserve.


What Comes Next


Clients of TFM360 can feel confident that we are continually monitoring the fundamentals and charts and are fully prepared to incorporate our analysis into our TFM360 recommendations. To take advantage of our comprehensive approach to farm marketing, we invite you to become a client of TFM360. As a client, we will keep you informed as events unfold, and look forward to helping you make the right decisions for your operation in light of changes to the dollar and any other factor that impacts the price you get for your hard-earned production.


Matt Mattke

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