The value of the dollar continues to drop, now reaching its lowest weekly level against the Euro since February. Indices that compare the dollar against a basket of major currencies show the same trend.
As long as the Federal Reserve keeps printing money to make borrowing rates decline, the dollar will remain weak. Some currency analysts point out that the Fed is not likely to stop doing so until the second quarter of next year – so we are still a ways off.
What is the effect of US dollar depreciation on metal prices?
Metal prices typically follow an inverse relationship with the value of the dollar. When the dollar appreciates against other major currencies, metal prices tend to drop. When the value of the dollar weakens, metal prices generally go up.
Source: LME & St. Louis Federal Reserve Bank of Chicago & MetalMiner Analysis
The chart above shows how this inverse relationship works. The green line represents the Copper 3M LME price (weekly), while the blue line is the inverse of the dollar index (and for you stats folks out there – we used relative scaling to better see how closely they move). In the case of copper, there is a correlation of 86%, which means that copper prices strongly correlate with the value of the dollar.
Other metals show lower correlations, but generally speaking, it is relatively easy to find decent correlations between currencies and metal, especially for those metals that are traded in international liquid markets.
There are various reasons why the value of the dollar has an impact on metal prices. Here are the main two:
- Metal prices are generally priced in dollars. Therefore, when the dollar depreciates, it will take more dollars to buy those metals.
- Metals are traded globally. Foreign buyers will purchase metals in dollars (or link their price to an index priced in dollars). When the value of the dollar declines, demand will tend to increase as a result of increased purchasing power.
In conclusion, we are likely to see a weak dollar as long as the Fed continues its bond-buying activities, and this might help support or raise the prices of some metals.