Wednesday December 24, 09:06 AM

Source: Indian Express Finance

Dollar-commodities link dead after debate

Go long commodities, short the dollar rang the battle cry that pushed oil, copper and wheat to record highs earlier in 2008. That trade unwound with fury over the past five months, as the dollar rebounded from record lows and commodities lost 60% or more. Now the greenback is once again in decline, but analysts say that they don t expect that to rekindle interest in an inverse correlation trade that, for some, was dubious to begin with. With the credit crisis having shaken out the speculative capital that thrived on such cross-market trades, and the world economy headed into its worst recession in seven decades, most analysts agree that relationship is dead for now. The correlation is broken down here. It shows that this is very much a fundamental story, said Mitul Kotecha, head of global foreign exchange research at Calyon, Hong Kong. The demand and supply of oil is overwhelming the overall influence on oil prices at the moment so that Opec has to come up such a drastic cut. The inverse relationship between the dollar and the broad commodities complex has always claimed a theoretical fundamental basis, as the world s dollar-based raw materials become more affordable to non-dollar economies as the greenback weakens. As China and India led a global demand boom, the allure of that link became even stronger, and since 2006, as the sector s rally began to accelerate, it seemed to be a great excuse to short the dollar and go long copper, oil or grains. To be sure that there were secular reasons for both legs the ballooning US trade and budget deficits, and the growth of the euro as an alternative reserve currency, weighed on the dollar; speculative fervour and investment fashion aided commodities. But in the last several weeks, as expectations for growth in China and India have been sharply scaled back and as tight global credit prevents speculators from re-entering commodity markets, the relationship has largely broken down. For the moment, the outlook for both is grim. The greenback has lost over 10% against the euro in the last three weeks. Only the correlation with gold, a quasi-currency that has always claimed the closest link, has remained strong. In times of healthy demand, the dollar is a prime driver of prices with close correlations. The problem now is that non-dollar buyers are struggling with their own demand slowdown, the theory doesn t work any more, said MF Global commodities analyst Edward Meir. Reuters