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Commodities Falter in Currencies as History Shows Dollar Wins

A trader speaks on the telephone while on the floor of the London Metal Exchange in London. Photographer: Chris Ratcliffe/Bloomberg
A trader speaks on the telephone while on the floor of the London Metal Exchange in London. Photographer: Chris Ratcliffe/Bloomberg

Dec. 20 (Bloomberg) -- Speculators betting the commodities rally will continue into a third year are being confronted by currency investors wagering the dollar will strengthen in 2011. If history is any guide, the foreign-exchange market will win.

Traders have almost tripled their net-long positions in 20 raw-material futures the past five months to the highest level in at least four years, driving a 26 percent gain in the Thomson Reuters/Jefferies CRB Index, government data show. Contracts on the dollar strengthening against the euro have climbed to a three-month high. The U.S. currency moved in the opposite direction of commodity prices 18 of the past 22 quarters, according to data compiled by Bloomberg.

The U.S. Dollar Index has risen 5.9 percent since Nov. 4 on signs the Federal Reserve’s quantitative easing policy was boosting the U.S. economy. The inverse relationship between the currency market and commodities has strengthened since 2005 and last month reached the highest level in a year. Open-interest data shows investors are stepping back from raw materials after gold and cotton climbed to records and oil and copper reached the highest levels since 2008.

“A lot of the big rise in commodities has not been about fundamentals, but was driven by hot money pouring in as people backed away from other assets,” said Peter Sorrentino, who helps oversee $13.8 billion at Huntington Asset Advisors in Cincinnati and predicted the 2008 slump that sent the CRB index to a 36 percent loss. “Going against the signals from the currency market would be like spitting in the wind.”


During the 11 quarters in which the Dollar Index has gained since the first quarter of 2005, the CRB fell eight times, data compiled by Bloomberg show. The 120-day correlation coefficient between the two gauges touched -0.95 last month, the strongest inverse relationship in more than a year, the data show.

A reading of 1 indicates two assets move in lockstep, while -1 shows the reverse. In December 2000, the reading was 0.5 to 0.6, signaling limited correlation, data compiled by Bloomberg show.

The CRB climbed 1.8 percent to 320.62 last week to the highest level since October 2008. This year, cotton almost doubled, silver touched a 30-year high, and coffee reached the highest level since 1997.

IntercontinentalExchange Inc.’s Dollar Index, which measures the currency’s performance against six counterparts including the euro and yen, gained 0.4 percent to 80.373 last week, extending its 2010 rise to 3.2 percent.

Different This Time

Commodity bulls are betting this time is different, as China’s 10 percent economic growth spurs record demand for sugar and soybeans and rising imports of copper that helped send inventories on the London Metal Exchange to the lowest since October 2009.

An index of net-long positions by hedge funds and other large speculators in commodity futures from silver to natural gas climbed to 1.535 million contracts on Dec. 7, the highest level since at least February 2006, as far back as data is available from the Commodity Futures Trading Commission. Net holdings were 520,530 contracts on July 6.

“We will see commodities decoupling from the dollar,” said Christoph Eibl, who manages more than $2 billion as the co-founder of Zug, Switzerland-based Tiberius Asset Management AG. “Demand for metals is strong, and that will help buoy higher prices.”

Trimming Bets

Contracts outstanding on the 19 commodities in the CRB Index show investors are trimming positions. The so-called open interest slipped 6.1 percent to 7.36 million contracts from a 32-month peak of 7.84 million on Nov. 12, data compiled by Bloomberg show.

Investor demand for commodities increased amid the worst financial crisis since the Great Depression and widening budget deficits in Europe and the U.S. because raw materials tend to maintain their value as confidence in financial assets ebbs.

Commodity assets under management totaled a record $354 billion in November, up 31 percent from the end of 2009 and almost four times as much as in 2005, according to data compiled by Barclays Capital.

The cash inflow may total $60 billion this year after reaching $76 billion in 2009, the most ever, said Suki Cooper, an analyst at Barclays in New York. Exchange-traded products linked to metals, agricultural products and energy surged 22-fold since 2005 to $147 billion last month, she said.

‘Rather Dubious’

“I’m becoming concerned over the degree of speculation in the commodity” markets, said David Rosenberg, the chief economist at Gluskin Sheff & Associates, a wealth management firm in Toronto. “The outlook for a continuation of the bull market over the next six months appears to be rather dubious.”

Rosenberg predicted in December 2007 that the U.S. would enter a recession, a year before it was declared by the Cambridge, Massachusetts-based National Bureau of Economic Research. He said in late July that the rebound in the Standard & Poor’s 500 Index “has run out of steam.” The benchmark gauge for American equities has gained 13 percent since July 30.

He’s now projecting the dollar will gain as much as 10 percent over the next six months as Europe’s debt crisis spreads from Greece and Ireland to Portugal and Spain. Bets by hedge funds and other large investors that the dollar will strengthen have climbed this month to the highest level since Sept. 10.

Speculators held a net-short position on the euro of 15,290 futures contracts as of Dec. 7, CFTC data show. As recently as Oct. 5, the net-long holding had reached a one-year high of 48,243 contracts. As of Dec. 14, net-shorts totaled 10,304, the latest data show.

Biggest Trade

The euro-dollar trade is the biggest in the currency market, according to the Basel, Switzerland-based Bank for International Settlements. The euro accounts for 57.6 percent of the weighting in the Dollar Index, which retreated 14 percent from June 7 through Nov. 4 amid concern the U.S. would fall back into a recession and the Fed would debase the greenback by purchasing $600 billion in Treasuries. The dollar then rebounded as reports on industrial production, consumer confidence and retail sales signaled the American economic recovery was gaining momentum.

About $4 trillion in currencies trade daily on the world’s exchanges, compared with $391 billion of futures and options on raw materials, estimates from the BIS and Barclays show.

“The currency market is massive compared to commodities,” Huntington’s Sorrentino said. “When money comes surging into commodities like it has, it makes it more vulnerable to the swings of sentiment. The currency market has a tendency to swing quickly and catch people off guard.”

Dollar Output

Europe’s fiscal woes will send the Dollar Index to its highest level since July 1 as soon as next quarter, according to Michael Pento, a strategist who forecast the 2008 slump in commodities, last year’s rebound and 2010’s rally in gold.

Rising debt levels will drag on global growth and commodity prices, said Pento, the senior economist at Euro Pacific Capital Inc. in New York. Copper may drop 11 percent to $3.75 a pound in New York in the first half from a 31-month peak on Dec. 14, he said.

“Is the economy muddling along? Yes,” Pento said in a telephone interview. “Is all the news bad? No. But you cannot have all these debt issues and then expect to have all the problems solved so quickly and go back to prosperous growth.”

China’s growth will slow to 9 percent in 2011, according to the median estimate of 18 economists surveyed by Bloomberg. The central bank raised lending and deposit rates in October for the first time since 2007 to combat the fastest inflation in two years.

Slower Expansion

The U.S. expansion will slow to 2.6 percent from 2.8 percent this year, the median forecast of 69 economists in a Bloomberg survey showed.

None of the currencies of countries whose economies are most tied to commodities are likely to strengthen next year, according to surveys of strategists and economists by Bloomberg News. Exchange-rates for Australia, South Africa, Brazil, Canada, New Zealand and Chile are all at least 10 percent overvalued based on the relative costs of goods and services, after rallying at least 17 percent, according to the Organization for Economic Cooperation and Development in Paris.

“The dollar will be fine,” said Michael Aronstein, the New York-based strategist at Oscar Gruss & Son Inc. who predicted the 2008 commodity plunge. “I’m not a big advocate of commodities at the moment. There are better alternatives.”

To contact the reporters on this story: Yi Tian in New York at; Debarati Roy in New York at

To contact the editor responsible for this story: Steve Stroth at

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