Don’t blame the dollar for commodity crunch

October 13, 2010, 2:41 PM UTC

It’s always fun to point fingers. But the weak dollar doesn’t deserve all your scorn for the boom in, say, corn.


Commodity prices have surged in the months since Fed officials led by Ben Bernanke started talking in earnest about further asset purchases. Their loose-money talk has yet to lead to any action, but the jawboning tends to drive the dollar down anyway by suppressing U.S. interest rates.


The buck doesn't stop here


Over the past three months, the CRB spot index has jumped 17%, while the broad dollar index has slid 8%, seeming to confirm the link between a weakening dollar and strengthening commodities.

Yet a look at returns on futures contracts for all of 2010, via (see right ), tells a different story. For the year, as in July-to-October period, the biggest gains are in grains and precious metals such as gold, silver and palladium. But the dollar over that period is basically flat – down just 0.4%.

Commodity market watchers stress that while a weak dollar naturally contributes to rising prices in other assets, you can’t discount the impact of changing economic forecasts and supply-and-demand factors in individual markets.

“The last year has been interesting,” says Evan Smith, manager of the

U.S. Global Investors Global Resources Fund

, which invests in the shares of commodity-linked companies such as miners and fertilizer makers. “The inverse correlation between the dollar and commodity prices has started to resume, but there are plenty of other drivers too.”

Take corn, for instance, which is up 34% this year, including a 52% surge in the past three months. The market has been whipsawed by changes in the Agriculture Department’s forecasts of the U.S. corn crop, highlighting the utter unpredictability of agricultural commodities.

Meanwhile, expanding emerging market economies and improving diets in places like China will mean more demand in coming years for crops like corn and soybeans, bulls say. They see growing demand clashing with already stretched supplies.

In the precious metals, the story most often told is one of profligate central bankers, but there is also one of a double-dip recession apparently avoided.

“There has been a lot of concern about the global economy, and if we managed to dodge it we’re going to have more demand for metals like silver and palladium that have industrial uses,” Smith said. Silver is used in electronics and palladium, along with platinum, in the catalytic converters that scrub auto exhaust.


Not your father's strong dollar policy


And it bears recalling that as loquacious as the Fed has been recently on the subject of quantitative easing, it’s not the only central bank pursuing unprecedented policies in the wake of the financial meltdown. Members of the Bank of England have been discussing the need for QE over there, and the European Central Bank continues to stimulate away as well.

For a truly compelling race to the bottom you need a good-sized field, after all.

“So while you’re embarrassed about the dollar, remember stupidity doesn’t stop at the water’s edge,” Bianco Research strategist Howard Simons writes. “Other central banks are cranking up the printing presses, too.”