The U.S. dollar is an important investment indicator. The value of the dollar relative to other currencies can point to lucrative investment opportunities.
Strengthening foreign economies manifest in a weakening U.S. dollar, and vice versa. Given that the U.S. dollar remains the world’s reserve currency, it experiences inflows during periods of global weakness and outflows during periods of global strength. No other country has this “safety” component.
In addition to moving inversely to foreign economic growth, the U.S. dollar moves inversely to commodities. The relationship between the dollar and commodities is easy to observe: When the dollar rises, commodities prices fall, and vice versa.
The chart below reveals a consistent inverse relationship between the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), a broad-based commodity index, and the dollar’s value relative to other currencies. Pay particular attention to 2015 on. The movements are nearly mirror images.
PowerShares Commodity Index and U.S. Dollar Value
It’s worthwhile to highlight the world’s number one commodity. Oil is even more sensitive to the dollar’s value. The dollar appreciated nearly 20% on the world stage since late 2014. In turn, the oil price dropped 60%.
iPath S&P GSCI Crude Oil Total Return (NYSEArca: OIL) and U.S. Dollar Value
You likely wonder about this relationship: Why do commodities move inversely to the dollar?
Commodity prices in general, and oil in particular, are denominated globally in dollars. The stronger the dollar, the fewer dollars required to buy a given quantity of a commodity. This is good for U.S. consumers. It’s not so good for U.S. producers, and not quite as good for foreign consumers.
U.S. producers receive fewer dollars for the same production. (Keep in mind, most of their costs are denominated in dollars.) Foreign consumers tend to pay less for oil (gasoline), but the discount depends on the value of their currency vis-à-vis the dollar.
Being value oriented, I like the opportunities that low commodity prices and a high dollar value present. Low commodity prices usually mean low stock prices in the companies that mine or extract these resources.
Low oil prices led me to the British oil and gas giant BP PLC (NYSE: BP) this past December. Oil prices have rallied 18% over the past three months. BP shares have rallied 13%. The dollar, on the other hand, has depreciated 4%.
I see further depression of the U.S. dollar and a further rise in commodity prices.
Worldwide economic growth is gaining momentum. The European Union markets are finally showing signs of life after the European Central Bank implemented its version of quantitative easing in March. In Japan, corporate earnings have been inching higher.
China, the world’s second-largest economy, has shown some improvement in recent months. China’s economic growth began to stall in the fourth quarter of 2014. An array of stimulus measures implemented by the government, from interest rate cuts to stepped-up spending, have assuaged investors’ concerns and helped stabilize the economy (though the long-term ramifications could prove less stabilizing).
Over the past few years, as the dollar was appreciating, one investment theme performed above all others: U.S. domestic companies have outperformed multinationals, and consumer stocks have outperformed commodity miners and extractors.
As the dollar reverses its rise, it’s time to rotate back into multinationals – specifically commodity-oriented multinationals. These companies will benefit from a weaker dollar, higher commodity prices and greater worldwide commodity demand.
I’ve recently added what I believe is the best company to play rising commodity prices to the High Yield Wealth portfolio. It’s a foreign giant that offers investors exposure to a wide array of commodities. That it is a first-rate dividend grower only adds to its appeal.
No matter where gas prices go – you get paid
Gas prices have been moving down for a lot of the country – thanks to fluctuations in crude prices. So finally, average American’s are getting a little relief at the pumps. However, one group of folks are taking it one step further – and letting big oil companies pay them to fill up. And believe it or not – it’s all part of an exclusive US Government program. And if you’re eligible, you could collect up to $310 in Gas Rebates very soon.