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'Commodities may struggle to gain momentum unless US dollar corrects significantly'

The US currency has been edging up benefiting from rising bond yields

April 03, 2021 / 01:46 PM IST

The announcement of a new US infrastructure bill, progress on the vaccine front, some upbeat economic data from China, persistent strength in the US equity market and US central bank's insistence on keeping monetary policy loose are some of the factors that have kept commodity prices in check.

Earlier in March, Gold slumped sharply to a 3-week low, but on the last trading session of the month and quarter it bounced back to trade near $1,715 per ounce. WTI Crude oil has been stuck in a narrow range around $60 per barrel, while copper prices have also been choppy at around $9,000 level on the LME.

The biggest factor weighing on commodities is the continuous rise in the US dollar.

The US dollar index surged to November 2020 high this week and marked its third consecutive monthly gain in March. The US currency has continued to edge up benefiting from rising bond yields. The US 10-year bond yield lately hit January 2020 high and gained for the fourth consecutive month in March.

The rise in yields and the US dollar reflects increasing optimism about the US economy on back of vaccination progress and stimulus measures. As per Bloomberg tracker, the US leads the world in total vaccines administered, and more supply is on the way.

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The pace of gains in US dollar and bond yields has risen lately owing to the worsening virus situation in Europe which has forced countries to impose stricter restrictions. Europe was already struggling with slow vaccine rollout and the situation is worsening with rising virus cases.

Outlook for the US economy has also improved amid persistent stimulus measures even as it increases the possibility of higher taxes. Amid the latest, President Biden unveiled a $2 trillion infrastructure plan to not only rehab the nation's aging roads and bridges but also to invest in everything from climate change research to incentives for electric vehicle purchases and energy-efficient housing. The proposal, however, faces an uphill climb in part because it includes a substantial corporate tax increase to pay for much of the new spending. The spending plan spans eight years, while $2 trillion in higher taxes could be generated over 15 years under the Biden plan.

The dollar is the king right now and unless we see a substantial correction in the US currency, commodities may struggle to gain momentum. While the US economy faces challenges as is evident from mixed economic data and rising virus cases, a sharp correction in the US dollar may not come unless the virus and vaccine situation improves significantly worldwide and especially in Europe.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Apr 3, 2021 01:46 pm

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