The recent rally in global commodity prices is at least partly explained by the decline of the dollar this year
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Financial history tells us that global commodity prices and the dollar tend to move in opposite directions. Commodity prices come down when the greenback strengthens and rise when the dollar weakens.
What is happening right now is in tune with this. The recent rally in global commodity prices is at least partly explained by the decline of the dollar this year. The dollar index is down almost 10% since the beginning of January. Commodity prices have rallied. Copper, which is considered by some analysts to be the barometer of global industrial activity, has rallied by a quarter since May.
Of course, price trends over the longer term are also explained by shifts in demand and supply. The structural downward shift in Chinese economic growth ended the earlier global commodity supercycle in 2014. But even temporary jumps in commodity prices can have a significant impact on Indian inflation, public finances and trade balance.
Massive commodity price inflation does not seem to be round the corner—but these price trends need to be watched carefully.