Beginners in the trade often ask why the US dollar affects the price of many products on the market. To answer this question, it is important to understand first what a reserve currency is.
Reserve currencies are currencies that are stored by central banks and large financial institutions in very large quantities. These currencies are used for major investments, massive transactions and all aspects related to the world economy.
One of the most remarkable reserve currencies in the world is the US dollar. It is widely known for its liquidity and it is the currency of America, one of the most powerful and stable economies in the world. Raw materials are generally priced in reserve currencies. Gold, oil, steel, platinum and many more are priced at the US dollar. Often, commodity buyers use the US dollar to purchase various commodities. Thus, a sudden change in the price of the dollar can largely affect a number of commodities on the market.
Commodities and the US dollar are inversely correlated. If the price of the dollar goes up, the price of raw materials goes down and if the price of the dollar goes down, the prices of raw materials go up. An increase in the value in US dollars indicates that the buyer will have to spend more of his own currency to buy a certain amount of a product. When raw materials become more expensive, their demand will decrease, causing prices to fall.
Each product has its own particular attributes. These attributes often affect the price of various products. But the value of the dollar has a greater influence on the prices of raw materials compared to the different attributes of raw materials. Even history has its testimonies with the reverse relationship between the US dollar and commodities. In 2014, a significant number of commodity prices fell when the dollar appreciated by around 23%.
As a trader, it is important to always monitor the price of the dollar and even the aspects that will affect its price. It is well known that commodities and the US dollar are moving in opposite directions. This information does not guarantee a specific investment decision, but it can guide reliable decision-making.
Another reason for the influence of the dollar is that commodities are global assets. They trade all over the world. Foreign buyers buy American products like corn, soybeans, wheat and oil with dollars. When the value of the dollar goes down, they have more buying power because it takes less of their currency to buy each dollar.