Global commodity prices have fallen across the board in the current quarter and in a more pronounced way so far in September. Crude, precious metals, base metals and agriculture have all taken price hits of varying degrees. There are of course a host of factors, but strengthening dollar has been a key factor driving commodity prices lower.

On July 1 this year, the dollar was 1.37 to a euro and by September 15 it rallied to 1.29. In other words, the dollar has gained about 5.6 per cent versus the euro. Against the Japanese yen, it has gained a little more. If anything, the prospects of the dollar gaining further ground are real. Many forex experts see the greenback at 1.25 by end-October and possibly test 1.20 levels towards the year-end.

A principal reason for the dollar to strengthen is the ongoing positive macro-economic developments in the US, arguably the engine of global economic growth. Macro data are turning positive as growth momentum is picking up. Unemployment numbers are falling. Importantly, the Federal Reserve is demonstrating a hawkish stance. Unwinding of quantitative easing (QE 3) has two implications. It is not only that liquidity is not expanding (or monetary policy is normalising), but also that there is strength of evidence that the US economic performance is improving.

However, notwithstanding the currency factor, fundamentals do prevail. For instance if a dollar-denominated commodity is indeed in short supply, prices are sure to rise despite dollar strength; but the currency factor will mute the price rally to an extent.

Importantly, commodities that are produced in and exported by the US will become less expensive, while commodities that will attract more demand because of US growth will find prices firming. Aluminium and palladium are good examples. Their demand is rising in the US.

On the other hand, dollar strength has surely hurt gold prices. The currency strength has outweighed even seasonal demand for the yellow metal. On September 10, gold closed at $1,248 an ounce, falling from $1,308 a month earlier and from $1,364 a year ago.

During the same period, Nymex crude moved down to $92 a barrel from $98 a month earlier and $107 a year ago. LME aluminium and copper prices have also fallen in the last four weeks as a result of dollar firmness among other reasons.

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