The price of commodities related to the value of the dollar and interest rates tends to follow the following cycle:
Interest Rates are Cut = U.S. Dollar is Pulled Lower = Gold and Commodity Index Bottom = Interest Rates Turn Up = Bonds PeakÞ Stocks Peak = Dollar Rises = Gold and Commodity Index Peak = Interest Rates Peak = Bonds Bottom = Stocks Bottom = Interest Rates are Cut = Cycle Begins Again
At times, however, this cycle does not persist and commodity prices do not bottom as interest rates fall and the U.S. dollar depreciates. Such a divergence from this cycle occurred during 2007-2008 as the direct relationship between economic weakness and weak commodity prices reversed. During the first five months of 2008, the price of crude oil was up 20%, the commodity index was up 18%, the metals index was up 24% and the food price index was up 18%, while the dollar depreciated 6%. According to Wall Street research by Jens Nordvig and Jeffrey Currie of Goldman Sachs, the correlation between the euro/dollar exchange rate, which was 1% from 1999-2004, rose to a striking 52% during the first half of 2008. While people disagree about the reasons for this divergence, there is little doubt that taking advantage of the relationship provides investment opportunities.
Profiting From the Falling Dollar
Taking advantage of currency moves in the short-term can be as simple as investing in the currency you believe will show the greatest strength against the U.S. dollar during your investment timeframe. You can invest directly in the currency, currency baskets or in exchange-traded funds (ETFs).
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Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.