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Commodities to get support if dollar corrects, virus and vaccine situation improves substantially

FOMC minutes released this week showed that Fed officials are cautious on the economy outlook and want to maintain an accommodative stance unless there is a substantial recovery.

April 09, 2021 / 01:52 PM IST

Commodities have continued to witness directionless trade amid mixed factors, however, a correction in the US dollar index has lent some support.

Gold rescaled the pivotal $1,750 an ounce, copper hovered near $9,000 per tonne, while crude oil held in the vicinity of $60 a barrel.

The US dollar index surged to November 2020 highs in late March but retreated to test a two-month low this week lending support to commodities at large.

The dollar has been on a rise for the last few months amid expectations that the US economy may outperform amid progress on the vaccination front and continuing stimulus measures.

Optimism over the US economy also fueled inflation and interest rate hike expectations, pushing bond yields to multi-month high which lent further support to the US currency.

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Optimism about the US economy was further confirmed by a recent upbeat US non-farm payrolls report and International Monetary Fund's growth estimates released this week. The IMF raised its forecast for US GDP growth in 2021 from 5.1 percent to 6.4 percent. Meanwhile, the US vaccination process has picked up pace with a seven-day average of over 3 million inoculations per day.

The dollar, however, corrected as the Federal Reserve continued to emphasise that interest rates may remain low. FOMC minutes released this week showed that Fed officials are cautious on the economic outlook and want to maintain an accommodative stance unless there is a substantial recovery. Fed Chairman Jerome Powell played down inflation risks, another indication that interest rates may remain low for a long time.

The US equity market witnessed some correction in early March as market players fretted about inflation and rising bond yields. However, the equity market soon resumed its upmove and set record high levels as market players played down the possibility of borrowing costs rising in the near future.

The dollar and US bond yields, however, managed to hold firm, keeping pressure on commodities. With the Fed's continuing insistence that monetary policy may remain accommodative, the US dollar is showing some signs of correction and this has put a floor to commodity prices.

However, the key question is whether the current correction in the dollar will continue or the US currency will resume its upward move. Given the current situation where the US is leading on the vaccination front and virus cases though rising are still under control and the Biden administration is working on an infrastructure package to boost growth, any substantial decline in the greenback seems unlikely. We need a substantial improvement in the virus and vaccine situation, especially in Europe, to see a sustained decline in the US currency.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
first published: Apr 9, 2021 01:52 pm

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