What Yellen said
Janet Yellen, chair of the Federal Reserve, cited the US dollar’s (UUP) appreciation as a concern several times during her December 2 speech before the Economic Club in Washington, D.C. She also said that “the U.S. dollar has appreciated substantially since the middle of last year, making our exports more expensive and imported goods cheaper.”
The US dollar could continue to strengthen if there’s a rate hike by the Fed in December. The dollar has been on an uptrend for the last couple of months. After Yellen’s speech, the dollar index closed at 100.3 on December 2, up from the previous day’s close of 99.9.
Commodity prices tend to have an inverse correlation with the US dollar (UUP). When the dollar gains, commodities tend to fall, and vice versa. The reasoning behind this relationship is straightforward. Since most commodities are priced in the US dollar, a strong dollar makes commodities relatively costlier in other currencies.
Copper is no different from other commodities that have a negative correlation to the US dollar, as you can see in the graph above. A stronger US dollar acts as the nemesis of copper.
Further strengthening of the US dollar could negatively impact copper prices. Copper producers, including Freeport-McMoRan (FCX), Southern Copper (SCCO), and BHP Billiton (BHP), are already reeling under multiyear low copper prices. Together, Rio Tinto (RIO) and BHP Billiton form ~5.8% of the SPDR S&P Global Natural Resources ETF (GNR).
Another concern for Freeport-McMoRan is that its borrowing costs might go up if there’s a rate hike. We’ll explore that in the next part of the series.