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Is the U.S. Dollar/Commodity Trade Ripe for Reversal?

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December 1, 2015
U.S. dollar versus commodities, including gold

It's no secret that it's been a tough year for the commodity markets. Year-to-date declines spread from crude oil to corn, and didn’t stop with most energy, metals, and grains contracts. Supply-and-demand factors are at work, but so is the impact of a strong dollar. But this trend has gripped global markets for the entirety of 2015, and its shelf life is now under scrutiny.

Commodity markets traditionally have an inverse correlation to the U.S. dollar, as many are priced and sold in dollars on the world marketplace. The U.S. dollar index—which compares the greenback to a broad basket of currencies—is up some 11% in 2015, boosted in part by industry expectations for a U.S. interest rate tightening cycle in coming weeks and months. That could drive a deeper wedge between dollar-boosting interest rates here and a tendency toward steady-to-easier interest rate policy in much of the rest of the world.

Renewed Retreat

For now, November delivered a fresh round of commodity price losses, featuring gold’s tumble to a fresh, five-year low. In November, 21 out of 24 commodities in the S&P GSCI were negative. In 2015 through November, the index’s total return is down 26.3%, on pace to be the fifth worst year since 1970. 

Year-to-Date Commodity Performance 

  • Natural gas down 40.7%
  • Crude oil down 35.8%
  • Gold down 11.2%
  • Coffee down 33.2%
  • Soybeans down 13.5%
  • Corn down 17.3%
  • Sugar down 6.4%

Source: S&P Dow Jones Indices

Old News?

The dollar index, up roughly 11% this year, may see the pace of its gains slow in 2016. "We expect the dollar to be on average 2% higher in 2016, versus 2015. Most of the gains in the dollar have already been priced in," says Sam Stovall, managing director at S&P Capital IQ.

Picking tops and bottoms in any market can be treacherous. But the dollar and commodity markets could be setting up for a phenomenon that traders often refer to as "buy the rumor, sell the fact.” Just as the phrase implies, we’re talking about a market tendency to price in news well before it happens. As traders brace for the first potential Fed rate hike in nine years, some analysts warn the greenback may have already priced in the impact of higher interest rates.

"Sometimes the fear is greater than the actual event. We've had such uncertainty surrounding the Fed and when it will begin hiking rates. Once that uncertainty is over, maybe we do find a base in commodities, or get a bounce," says JJ Kinahan, chief market strategist at TD Ameritrade.

Already, industry forecasts for higher crude oil are beginning to filter across Wall Street following this year's hefty declines. "We believe oil prices will strengthen slightly in 2016, to average about $50 per barrel [from current territory near $40]," says Stovall.

TD Ameritrade clients can use TD Ameritrade charting features to monitor the inverse correlation between the U.S. dollar index and commodities (figure 1). For traders who aren't quite willing to dip their toe into the world of commodity futures trading, studying this relationship can still prove beneficial when analyzing the global economy and the potential impact on commodity-sensitive stocks.  

"Clients can use TD Ameritrade screening tools to identify potential investments that are designed to track an underlying commodity, or group of commodities," says Kinahan. 

Gold futures and the U.S. dollar index

FIGURE 1: STUDY TIME.

A daily chart of gold futures (red and green bars) and the U.S. dollar index (purple line). To build similar studies between two or more contracts, log in to the thinkorswim® platform, go to the Charts tab, and input /GC in the symbol box to bring up a gold chart. Click Studies in the upper-right corner > Quick Studies > Compare With > Custom Symbol > for the dollar index, input /DX. For illustrative purposes only. Past performance does not guarantee future results.


Commodity investments are often subject to unique risks, including significant price volatility, and are not suitable for all investors.

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