What is the co relation between Dollar depreciation and commodity appreciation ?

Question

As long as US Dollar was depreciating against all most all the currencies,the commodity prices were rising for last four years and now it is reverse.How to explain it ?

Answer 1

This is a direct 1:1 inverse relationship.  Here's why:  You know what a dollar is.  It is a piece of paper you'll exchange for something else.  That something else is the "commodity."  So, if the commodity is butter, you'll exchange $1.00 for a pound of butter (let's say.)  If there is suddenly a shortage of butter (either because demand is up, or because the supply is down) you may be willing to pay more for butter.  So, if you'd pay $1.05 for that same pound of butter, then your value of the dollar has dropped, while the value of the commodity you wish to buy has risen.  These two must always move inversely proportional--that is when one goes up, the other must go down.  A "weak" dollar makes our commodities appear expensive.  A "strong" dollar, makes our commodities appear cheap.

In America today, we are shipping $1,000,000,000.00 a day of our dollars overseas to buy oil.  Well, the rest of the world says, we don't need your dollars so much as we need what the dollars would buy.  So, they are willing to trade the cheap dollars to us for just $.95 worth of butter (for instance.)  They have dollars, and demand commodities.  If we, on the other hand, say, "Hey, we don't want the dollars either--we'd rather have the butter."  If we try to charge $1.05 for the butter, they will find it elsewhere, so no deal is made.  The entire system must always stay in balance, as long as no one is artifically manipulating the system (as with a government price-subsidy, or a "price freeze" or some other tax.)

If the dollar "goes up" then it means conversely that the price of things the dollar will buy "goes down."  If the dollar "goes down" then the price of things it would buy must "go up," or no exchanges of dollars for commodities would take place.

Answer 2

You can probably find historical price correlation data by doing some google research.  OR you can download historical rates of return on the dollar, and various commodities, and use microsoft excel to calculate historical correlations.

however, there are many other factors affecting commodity prices besides the value or strength of the dollar.  Supply and Demand.  Some commodity prices are more tied into movements in teh dollar than others.  Gold, for instance, is known to have a negative correlation with the dollar.

This would be fairly easy calc once you download historical prices into excel.  i think the formula is =rsquared(X, Y) ...i think.  you can find it easily under statistical formulas by clicking on the fx function button on the left side of the text box in excel.