Why did the US dollar weaken?
The US dollar (UUP) started weakening since January 29, 2016, after the Bank of Japan declared its monetary policy decision to move towards a negative interest rate zone. The Bank of Japan’s decision forced Fed policymakers to wait longer before raising the interest rate again. Global growth concerns continue to rise. The US Dollar Index fell nearly 3% from January 29, 2016, to February 2, 2016.
In mid-February, Fed Chair Janet Yellen’s statement about being more cautious with the gradual rate hike process weaken the US dollar. On March 16, the FOMC (Federal Open Market Committee) decided to keep the interest rate unchanged at 0.25%–0.50%. The Fed softened or backed away from its previous urgency toward raising the interest rate due to increased concerns about global (ACWI) growth. This hampered the movement of the US dollar. The US Dollar Index fell 1.2% on that day. Also, data showed that US (SPY) (QQQ) (IVV) industrial production fell by 0.5% in February—compared to a rise of 0.8% in January. This weakened the US dollar. As the dollar weakens, it provides a boost to dollar-denominated assets like commodities. Major metal and energy stocks such as Freeport-McMoRan (FCX), ConocoPhillips (COP), and Kinder Morgan (KMI) gained 98%, 33%, and 31%, respectively, since February 11, 2016, as of March 21, 2016.
What does the past show?
In mid-2014, we saw that the US Dollar Index was getting stronger. This impacted commodities’ movement. From June 2014 to December 2014, the US Dollar Index strengthened by around 13%. The PowerShares DB Commodity Tracking ETF (DBC) fell nearly 30% during the same period. In the current scenario, the US Dollar Index fell 4.2% since January 29, 2016, to March 21, 2016. DBC rose 7.4% during the same period. It shows that if there’s a little movement in the US Dollar Index to either side, it impacts commodities’ movement in the opposite direction.