The weak dollar has played a role in the latest surge in commodity prices. Yesterday, it held relatively steady, though it was languishing near an all-time low it hit last week against the euro. This year, it has weakened 4.9% against the European common currency and 8.7% against the Japanese yen.
When the dollar weakens, commodities priced in dollars effectively become cheaper for buyers holding other currencies, spurring demand. At the same time, the producers of these commodities have an incentive to boost prices, since they are getting paid in less-valuable dollars.
A broader shift could also bring the dollar under renewed pressure. Since the U.S. currency's slide began in 2002, the lion's share of its weakness has been felt against free-floating currencies in developed markets, such as the euro and the Canadian dollar. Now it may be the turn of currencies in developing markets, especially in Asia and the Middle East, to strengthen against the dollar. Mounting inflation is speeding up the shift. A more robust local currency would make imports cheaper, helping to blunt the impact of rising prices.
On the weekly chart, notice the following:
-- Prices have been dropping for two years.
-- Prices are continually broken through support
-- There is a clear pattern of lower lows and lower highs.
On the daily chart, notice the following:
-- Prices have broken through the lower line of a bear market pennant consolidation.
-- Prices have moved through support established in late November
-- Prices are below all the SMAs
-- The shorter SMAs are below the longer SMAs
-- All the SMAs are moving lower
This is a very bearish chart
