Strengthening Dollar Seen by UBS Damping Demand for Commodities

A strengthening U.S. dollar will damp demand for commodities this year, according to UBS AG.

The greenback, at a four-month high against 10 major peers, will strengthen further because of the Federal Reserve’s tapering of stimulus, the shale oil and gas “boom” and a growing trend for businesses to move back to the U.S., the bank said in a report dated yesterday. That will damage conditions in emerging markets and commodity demand, according to the bank.

“We believe we are about to see a cyclically and structurally stronger dollar,” Julien Garran, a London-based analyst at UBS, wrote in the report. “A strong dollar will prove to be a major problem for commodities and emerging markets in 2014.”

Investors dumped emerging markets and commodities at a record pace last year amid concerns slowing growth there will curb demand for raw materials and a stronger dollar will add to the headwinds. Investors withdrew a record $43.3 billion from commodities and $31.4 billion from emerging-markets bond funds, the most ever, according to researcher EPFR Global. Withdrawals from emerging markets equity funds were $27.6 billion.

“When the dollar trends higher, and capital flows out of emerging markets, commodity intensity in global GDP growth tends to fall by two-thirds,” Garran wrote. “Historically, trend global copper demand growth has fallen from 5 percent under emerging markets inflows to 1.6 percent under outflows.”

The Bloomberg Dollar Spot Index rose to a four-month high today and is 1.6 percent higher this year. The gauge’s 3.5 percent gain last year was the biggest since 2008. The Standard & Poor’s GSCI Index (SPGSCI) of 24 raw materials slid 2.2 percent last year, its first drop since 2008, and fell 2.2 percent so far this year.

To contact the reporter on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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