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US DOLLAR GOING UP MAKES COMMODITIES GOES DOWN - WHY? • Finimize Finimize

US DOLLAR GOING UP MAKES COMMODITIES GOES DOWN – WHY?

 

Commodities are priced in US dollars (even the Europeans buy a barrel of oil in US dollars). So, WHEN THE US DOLLAR GOES UP IN PRICE, THEN COMMODITIES GO DOWN IN PRICE (all other things being equal). Does this concept make sense to you? If not, read on

Assume 3 people (a Brit, a Frenchman and an American) are trying to buy a barrel of oil. A barrel of oil costs $43.00. For the American, the cost is straight-forward: it’s $43.00. For the Brit, because he operates his business in pound sterling, the oil costs 28.00 (due to the exchange rate) and for the Frenchman, the oil costs 40.00.

But suddenly, the US dollar appreciates by 10% versus the other currencies. The American doesn’t really care: he is still prepared to pay $43.00 for the barrel – nothing has changed for him. But the Brit can only afford to pay 28.00, which, because of the new exchange rate, is now worth only $38.70. The Frenchman is in the same position: he can only afford to pay 40 for the barrel of oil, which now equates to $38.70.

There are no other buyers at the moment because everyone else has already bought enough oil for the time being (e.g. demand is constant). So the oil seller is forced to drop his price to meet what the Brit and the Frenchman are prepared to pay. Nothing has really changed: the Brit and Frenchman still bought 1 barrel of oil at the same cost to them (in terms of their own currency), but the price of the oil went down. And it went down solely because the value of the US dollar went up.

While this is obviously a simplified example, this is essentially what happens on a large scale. Replace “Brit” and “Frenchman” with the UK economy and the European economy. Add in the Chinese, Japanese, Africans and everyone else (all of whom think of the cost of oil in their own currencies) and you get the above example occurring on a much bigger scale. That’s why when the US dollar goes up in value (and all other factors – like demand – remain constant), the price of oil goes down.

Does that make sense? If youhave any comments or questions, leave a postbelow and we’ll be happy to help.

November 2015.

Finimize.com publishes a daily financial news email. It’s easy-to-understand, takes 3 minutes to read and is totally FREE. You can sign up here.

 

Commodities are priced in US dollars (even the Europeans buy a barrel of oil in US dollars). So, WHEN THE US DOLLAR GOES UP IN PRICE, THEN COMMODITIES GO DOWN IN PRICE (all other things being equal). Does this concept make sense to you? If not, read on

Assume 3 people (a Brit, a Frenchman and an American) are trying to buy a barrel of oil. A barrel of oil costs $43.00. For the American, the cost is straight-forward: it’s $43.00. For the Brit, because he operates his business in pound sterling, the oil costs 28.00 (due to the exchange rate) and for the Frenchman, the oil costs 40.00.

But suddenly, the US dollar appreciates by 10% versus the other currencies. The American doesn’t really care: he is still prepared to pay $43.00 for the barrel – nothing has changed for him. But the Brit can only afford to pay 28.00, which, because of the new exchange rate, is now worth only $38.70. The Frenchman is in the same position: he can only afford to pay 40 for the barrel of oil, which now equates to $38.70.

There are no other buyers at the moment because everyone else has already bought enough oil for the time being (e.g. demand is constant). So the oil seller is forced to drop his price to meet what the Brit and the Frenchman are prepared to pay. Nothing has really changed: the Brit and Frenchman still bought 1 barrel of oil at the same cost to them (in terms of their own currency), but the price of the oil went down. And it went down solely because the value of the US dollar went up.

While this is obviously a simplified example, this is essentially what happens on a large scale. Replace “Brit” and “Frenchman” with the UK economy and the European economy. Add in the Chinese, Japanese, Africans and everyone else (all of whom think of the cost of oil in their own currencies) and you get the above example occurring on a much bigger scale. That’s why when the US dollar goes up in value (and all other factors – like demand – remain constant), the price of oil goes down.

Does that make sense? If youhave any comments or questions, leave a postbelow and we’ll be happy to help.

November 2015.

Finimize.com publishes a daily financial news email. It’s easy-to-understand, takes 3 minutes to read and is totally FREE. You can sign up here.

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