CURRENCY FLUCTUATIONS AND COMMODITY PRICES: DISCUSS THE RELATIONSHIP BETWEEN CURRENCY MOVEMENTS (ESPECIALLY THE US DOLLAR) AND COMMODITY PRICES

Pooja Yadav; Jagat Narayan Giri

doi:10.29121/shodhkosh.v4.i1.2023.3518

Authors

Pooja Yadav Research Scholar, Sushant University
Dr Jagat Narayan Giri Professor at Sushant University

DOI:

https://doi.org/10.29121/shodhkosh.v4.i1.2023.3518

Keywords:

Currency Fluctuations, US Dollar, Commodity Prices, Crude Oil, Hedging Strategies

Abstract [English]

Background:
This study explored the relationship between currency fluctuations, particularly those of the US dollar, and commodity prices, focusing on crude oil, gold, wheat, and soybeans. The inverse correlation between the US dollar and commodity prices is widely accepted, but this study aimed to provide primary data analysis to quantify this relationship and assess the sensitivity of different commodities to currency movements.
Methods:
A prospective cohort study was conducted over a 12-month period, collecting real-time data on commodity prices and US dollar exchange rates. Fifty participants, including commodity traders and financial analysts, provided transaction data for analysis. Descriptive statistics, correlation analysis, and multiple regression were used to analyze the data. The sensitivity of commodities to changes in the US dollar was assessed, and volatility and risk mitigation strategies employed by traders were also examined.
Results:
The study found a strong inverse relationship between the US dollar and the prices of crude oil and gold, with correlation coefficients of -0.72 and -0.65, respectively. Regression analysis showed that US dollar fluctuations explained 52% of the variance in crude oil prices (P = 0.0001) and 47% of the variance in gold prices (P = 0.0003). Agricultural commodities such as wheat and soybeans had weaker correlations with the US dollar, showing coefficients of -0.42 and -0.35, respectively. Volatility analysis indicated that crude oil and gold were more susceptible to price fluctuations than agricultural commodities. Hedging strategies, including forward contracts and currency options, were used by 65% of traders to mitigate currency risks.
Conclusion:
The study confirmed a significant inverse relationship between US dollar fluctuations and commodity prices, with crude oil and gold being most sensitive to currency movements. Agricultural commodities were less affected by currency changes, with external factors such as supply-demand dynamics playing a larger role. The findings suggest that currency fluctuations remain a critical factor for commodity traders, who actively employ hedging strategies to mitigate risks.

References

Akram QF. Commodity prices, interest rates and the dollar. Energy Economics. 2009;31(6):838-51. DOI: https://doi.org/10.1016/j.eneco.2009.05.016

Rogoff K. The purchasing power parity puzzle. Journal of Economic Literature. 1996;34(2):647-68.

Sarno L, Taylor MP. The economics of exchange rates. Cambridge University Press; 2003. DOI: https://doi.org/10.1017/CBO9780511754159

Akram QF. Oil prices and exchange rates: Norwegian evidence. The Energy Journal. 2009;30(2):51-71.

Kilian L, Murphy DP. The role of inventories and speculative trading in the global market for crude oil. Journal of Applied Econometrics. 2014;29(3):454-78. DOI: https://doi.org/10.1002/jae.2322

Cheng IH, Xiong W. Financialization of commodity markets. Annual Review of Financial Economics. 2014;6:419-41. DOI: https://doi.org/10.1146/annurev-financial-110613-034432

Frankel JA. The effect of monetary policy on real commodity prices. In: Campbell JY, editor. Asset prices and monetary policy. University of Chicago Press; 2008. p. 291-333. DOI: https://doi.org/10.7208/chicago/9780226092126.003.0008

Obstfeld M, Rogoff K. Global imbalances and the financial crisis: products of common causes. In: Financial Stability Review. Banque de France; 2009. p. 1-24.