Commodities cast wary eye on dollar and liquidity
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — You’d think commodities markets would like reviving economic growth. But despite positive data from Germany and the United States, prices are wobbling. The problem is that oil, food and metals prices have all thrived on a weak dollar, cheap money and inflows into real rather than financial assets. Recovery, a firmer dollar and higher interest rates are giving investors more to think about. There could be a lot of volatility ahead.
This week’s wobbles come at the end of a super-strong run. The Reuters-Jefferies CRB commodity index spurted up 10 percent in December, taking its annual rise for 2010 to 15 percent. Commodities were ripe for a correction. But their fall may signal more than that.
Dollar weakness and central bank money printing helped lift a broad range of commodities — as well as gold — in 2010. Hedge funds made hay with trades that shorted the dollar and went long commodities. Steep price gains had a marked speculative element.
Now, however, a dollar rally looks on. Yields on U.S. Treasuries have risen strongly since October, making dollar assets more appealing. The euro zone periphery crisis is another reason to switch out of the single currency and into the dollar. As the dollar rises, commodities, which are priced in dollars, tend to fall.
But the influence of real levels of supply and demand must also be taken into account. Real demand for many commodities should be well supported if global growth is indeed firm. Yet stronger growth, too, has its negative side. Inflation is up in China, India and even the euro zone. Asia has already seen interest rate rises. The liquidity taps that provided investors with cheap money are closing.
Stronger growth, but probably a stronger dollar, higher global inflation and interest rates, and perhaps less liquidity: that sums up the countervailing forces in commodity markets in 2011. The tide of money that streamed into commodities last year may no longer flow so reliably.