The Commodity and Currency Circle
If the global economy is slowing, and China is forced to work through excess inventory, demand for commodities will be impacted. I’m guessing crude oil prices, in particular, will suffer from the realities I just described.
And remember, commodity prices and currencies influence each other in a self-feeding circle.
For example, falling crude prices could be the one thing that allows U.K. and European central banks to begin lowering their interest rates.
If and when that happens, the dollar will become more attractive relative to those currencies.
It wouldn’t take a bold move on the part of the U.S. Federal Reserve, either (nor do I expect one).
A narrowing interest rate disadvantage between the dollar and euro - or the dollar and the pound - would be hugely supportive for the greenback.
In fact, this may very well be why the dollar HAS ALREADY been holding up given such incredibly dismal news day after day from the U.S. economy.
Take a look at this chart …
Are Oil and the Dollar Finally Breaking Their Inverse Relationship?
Over the last year or so almost everyone’s been pointing to the inverse relationship between the U.S. dollar and crude oil.
At the very left of the red rectangle on my chart, you can see where the tight inverse correlation began to break down. That’s when the dollar bounced higher from its all-time low. Crude soared well beyond its record high at the same time.
Crude rallying and the dollar drifting slowly higher simultaneously? That was certainly no inverse correlation.
But from the furthest right point of that red box is where the tight inverse correlation has resumed. Only this time, the direction is in favor of the dollar. And it comes exactly after a new all-time high for crude prices.
Translation: The buck could be back.
The dollar has been able to continue its rally this week, even amidst a blitzkrieg of central bank announcements. While it has a long way to go - and recovery may not be swift - I think it’s time to keep the dollar rally scenarios in clear sight. Especially now that other economies are catching the bug.
