The Impact of the Us Dollar's Movements on Commodity Prices

Abstract

In this study both the long- and short-term impacts of the US dollar's exchange rate movements on commodity prices are examined. Commodities such as food (including cereal, vegetable oils, meat, seafood, sugar, and fruit), beverages (including coffee, tea, and cocoa), metals (including aluminium, iron ore, tin, nickel, zinc, lead, and uranium), fuel energy (including crude oil, natural gas, and coal), crude oil (including simple avareges of Brent, WTI and Dubai fateh) and agriculture (including timber, cotton, wool rubber, and hides) are considered. The long-term impact of the US dollar on commodity prices is investigated using Maki's (2012) cointegration test, which allows multiple regime shifts, and the short-term effect is examined using Hatemi-J's (2012) asymmetric causality test. Furthermore, in order to determine the integration order of the series, Carrion-i Silvestre et al.'s (2009) unit root test with multiple structural breaks is used, and Bai and Perron's (1998, 2003) test is applied to determine whether or not models have regime shifts. Results show that there is an inverse long-term relationship between the US dollar and food, fuel, and energy commodity prices. In other words, an increase in the US dollar causes a decrease in the price of food, fuel, and crude oil commodities in the long run. And it is observed that this effect is more dominant especially in fuel and crude oil commodity prices. Additionally, asymmetric causality test results show that US dollar appreciation causes a decrease in all commodity prices under investigation, however US dollar depreciation causes an increase only in the price of fuel, crude oil, and agricultural commodities. This means that in the short run the impact the appreciating dollar has on commodity prices is stronger than that of the depreciating dollar.