Sinking Dollar Raises Global Buying Power For Commodities

A weakening dollar hurts U.S. importers and Americans traveling abroad, but the rest of the world benefits as commodities priced in dollars become more affordable.

Everyone wants to get more for their money, which is why the diminishing value of the dollar is making consumers around the world very happy. Most commodities are priced in U.S. dollars, therefore, as the value of the dollar falls relative to the value of other nations’ currencies, those nations and their consumers benefit.

The math is simple; if your local currency appreciates in value by say, five percent against the U.S. dollar, you get five percent more of whatever you buy that is priced in dollars.

For instance, crude oil is priced in dollars around the world. If a refiner in the European Union buys crude oil after the Euro (the currency of the EU) appreciates by five percent against the dollar, then the refiner gets the crude oil it needs for less Euros. A hundred Euros worth of crude oil can suddenly be obtained for only ninety-five Euros, simply because the value of the Euro increased versus the value of the dollar. This is a good thing for citizens of EU countries because the prices of the oil products they buy become more affordable without anyone actually having to do anything. Nothing behavioral actually changed, no additional investment had to be made by the refiner, and no sacrifice was made by the consumer to get more for less. It all just happens because of the sinking value of the U.S. dollar. The refiner makes more money, the consumer saves money, win, win.

The falling dollar isn’t great for U.S. citizens though. It makes their imports more expensive, because it takes more dollars to buy the currency they need to buy finished products from other countries; products that are generally priced in local currency. And it makes foreign travel more expensive, but that’s a post-pandemic problem.

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There is something else that happens when the dollar falls, something that eventually raises commodity prices for everyone, even the beneficiaries of dollar weakness. In general, demand rises for products as they become more affordable, and commodities are no exception to this rule. When demand increases, production has to increase with it, otherwise prices will rise to correct the imbalance.

Low prices are addictive; over time, low commodity prices generally cause significant upward shifts in demand. Low motor fuel prices often result in higher truck sales; trucks use more fuel per mile (or kilometer) traveled than cars. Demand for petroleum rises in a fundamental way; it creeps higher as the ratio of trucks to cars shifts in favor of fuel guzzling trucks. But if the supply of oil can’t meet the demand, truck owners won’t immediately sell their trucks, they will simply be willing to pay more for their fuel, hence the price of fuel will rise.

In the world of commodities, a falling dollar is a very big deal. Weaker dollar values enable the rest of the world to buy more commodities, increasing global demand. If history is any guide, higher global commodity usage will eventually lead to higher global commodity prices, and that affects everyone regardless of the currency they spend.

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