Ravindra Rao
Gold prices have surged to record high levels, silver has tested the highest level since 2013, crude oil is near March highs while copper is within sight of a near 2-year high set earlier this month.
While commodities have edged up because of their individual factors, the one common thread pulling them all is the weakness in the US dollar index.
The US dollar index has tested the lowest level since 2016 and is down more than 2.5 percent year-to-date. The index has witnessed mixed trend so far this year as it rose in the first four months only to reverse all the gains in the last three months.
While most currencies have risen against the US dollar in the last few weeks, the euro has been one of the biggest beneficiaries. Euro has surged to 2018 high and a large part of the rally has come post EU's agreement on the 750 billion euros rescue package.
The US dollar index rose in the early part of this year as increasing risks to the global economy in face of the virus outbreak pushed market players towards the safety of US currency.
The US dollar, however, began to weaken as the economic and virus situation in the US and Europe diverged. The US witnessed a sharp surge in cases forcing states to reimpose some restrictions. While cases rose in Europe as well the situation was much better than the US.
European economic data showed improvement from the slump caused by the virus outbreak while agreement on the rescue package improved future outlook. US economic data also showed improvement however labour data highlighted the strains on the economy.
Meanwhile, US policymakers struggled to reach an agreement on a new stimulus package. Tensions between the US and China also clouded outlook for both the economies.
The latest leg of the sell-off in the US dollar has come also amid positioning ahead of the Fed decision tomorrow. The Fed is expected to keep interest rate unchanged however the central bank may maintain a dovish stance owing to increasing challenges to the economy in face of rising virus cases.
Trend in the US dollar will remain pivotal in the near term for commodities at large. While the general trend looks weak, there is a possibility of some recovery in the US dollar but that is dependent on three factors, Fed economic and monetary policy stance, US GDP data and trend in virus cases.
The US Fed is likely to maintain a dovish stance and that has been factored in so if there is no fresh surprise from the central bank, the US dollar could stabilize. The first estimate for Q2 GDP growth will be released this week and is forecasted to show a sharp 34 percent contraction.
If the data is in line with or better than expectations, it could support the US currency. US virus cases continue to rise however the pace has slowed to some extent in the last few days and if we see further improvement, it could also support the US dollar.
The author is VP - Head Commodity Research at Kotak Securities.
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