Comparing the dollar's value with commodity prices

One of the enduring features of the market is the prevalence of common thinking that is not supported by the facts. And yet the facts are easily located and available to all. The market fall in 2007 caught many by surprise but the head and shoulder reversal pattern was clear on the chart of the DOW and other global indexes.

The rise and fall of the US dollar is said to be responsible for many movements in stock and commodity markets. When it looks like the US dollar is getting strong then many people believe this will deliver a blow to commodities and stock markets. On one level this makes intuitive sense, but when the history of price activity is investigated, the relationship is not as strong or consistent as many people believe. This can make the difference between success and failure in the market. Closer analysis of the market relationships allows for better decision-making and identifies better investment opportunities.

The common conclusion is that a strong US dollar leads to weaker commodity prices. We use copper as an example of a commodity. The monthly chart showing the combined behavior of the US Dollar Index and the copper price reveals some interesting relationships. In the period from 2005 through to the end of 2006 the US dollar was on a steady and strong upward trend, rising 11 percent. The copper price increased by 130 percent. A rising dollar was associated with a rising commodity price. It is not quite the result we expect.