Global Commodity Based Currencies

Commodities are often separated from other asset classes because they are inversely correlated with stocks, bonds and currencies. In the current environment of low commodity values, we see stocks and bonds near their highs, as well as currencies—specifically the US dollar. But commodities and currencies have a much closer relationship than it appears. The US dollar is one of the biggest influences on commodities. As the dollar rises in value, commodities drop. This happens because investors view the dollar as a safe haven asset when inflation is low. Commodities don’t generate profits—instead they maintain value outside of international currency fluctuations making them attractive during periods of high inflation when currency values are dropping. However, there are some currencies that are closely tied to commodity prices. Countries whose economies are closely tied to exporting commodities will have a currency that rises or falls alongside the worldwide demand for the underlying commodity. This correlation makes investing in these assets more volatile than others, and investors should be aware of the relationships.