In my Tuesday message, I agreed with the Fed chairman that commodity prices were rising against all currencies. That doesn't mean, however, that the falling U.S. Dollar isn't a major contributor to rising commodities. After all, global commodities are priced in dollars. Chart 3 shows that the latest surge in the CRB Commodity Index began last June just as the U.S. Dollar Index was peaking (see arrows). A dollar bounce during the fourth quarter coinicided with a modest commodity pullback. The dollar downturn during the first quarter of this year has contributed to another commodity surge. One of the most consistent intermarket relationships is that the dollar and commodities trend in opposite directions. The charts below all show a clear inverse relationship between the two markets and appear to contradict the view expressed by Mr. Bernanke that the lower dollar isn't a major reason that commodity prices are rising. Chart 4 shows them moving in opposite directions since 2007. Note their coincident turning points in 2008, 2009, and 2010. Every major turn in the dollar coincided a major turn in commodities in the opposite direction. Chart 5 gives an even longer view, and shows that the major upturn in commodities that started in 2002 coincided exactly with a major downturn in the dollar. A lot of the dollar weakness since 2002 is directly tied to aggressive Fed easing and, more recently, to the Fed keeping U.S. rates near zero. With rates in emerging markets already rising and Europe close to raising rates, it seems the dollar has nowhere to go but down (at least until the Fed starts raising rates). That should push commodity prices even higher and make the inflation problem even worse. That will be especially true in the U.S. which now has the world's weakest currency.
