Bloomberg U: Oil and the Dollar

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July 12 (Bloomberg) -- On today's "Bloomburg U," Dominic Chu looks at the relationship between the dollar and commodities on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

How it all came about and what it means to you.

Let's go to dominic chu in the data center with tonight's segment.

Well, mark, in today's "bloomberg u," we wanted to take a look at the relationship between the value of the u.s. dollar and the value of certain commodities.

Oftentimes you'll hear traders and investment managers talking about how the dollar's value affects the prices of things like gold, oil and wheat.

That's important.

So here's the reason why -- dollars and commodities, because commodities, like crude oil, like gold futures, like certain agricultural commodities, are all priced in u.s. dollars.

So there's a link here between the two.

If you want to guy these instruments you need u.s. dollars to do it.

Now, here's the trade dynamic.

If you want to buy that barrel of oil or that bar of gold you need those u.s. dollars.

So the dollars are key.

You need those to buy oil.

Now what would happen if the value of the dollar goes up?

If the value of the dollar goes up, it takes a lot more other currencies to actually buy every u.s. dollar.

So the euro weakens versus the u.s. dollar as it strengthens.

The yen weakens.

The pound weakens.

It takes all of these different current sis -- it takes a lot more of them to buy every u.s. dollar, which you need to buy oil.

So as the value of the dollar increases, the value of these commodities goes down because people are less willing to get out all of their currency to buy that stronger dollar that you need to buy oil.

Now, this isn't the only dynamic that affects the way prices are in the commodity markets.

Remember, there are other big factors as well.

Think about things like the geopolitical environment that we're in.

That has a big effect on the price of oil.

Even safe haven investments like gold.

Also supply and demand.

What happens if there are shrinking supplies?

Maybe the price goes up because of something like that.

Or demand increases.

All of a sudden that has an effect on commodity prices as well.

And of course, you have unprecedented central bank intervention from the fed, the bank of japan, the european central bank.

All of that creates certain imbalances, certain pricing dynamics that are all part of the commodity trade.

But certainly the value of the dollar plays a part in the way these commodities are priced, and that's the reason why it's important.

That's why we're talking about it today.

This text has been automatically generated. It may not be 100% accurate.

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