Commodities Stutter as Prospect of Fed Rate Hike Boosts Dollar

Updated on
  • Oil, metals, grains slide as gauge of dollar advances
  • Shares in raw materials producers lead losses in equities

A resurgent dollar is reminding commodities investors that the path to recovery will be fickle.

Oil, metals and agricultural products slid on Thursday as a gauge of the U.S. currency climbed to the highest since March, eroding demand for raw materials priced in dollars. The Bloomberg Commodity Index dropped the most in eight days, while shares in the world’s biggest producers from Glencore Plc to BHP Billiton Ltd. tumbled.

A rally in commodities this year has lost some steam after minutes of the U.S. Federal Reserve’s April meeting released on Wednesday raised the prospect of further increases in interest rates starting as soon as June, sending the dollar higher. Everything from Brent crude to copper had rebounded since slumping to multi-year lows at the turn of the year on speculation that the collapse in prices will constrain supply and help reduce production gluts.

“Investors should put their seat belt on because volatility is around the corner,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel, Nicolaus & Co. “There’s a fragility to the financial system to the extent that when the dollar starts to strengthen, it affects emerging-market currencies as well as the commodities complex.”

The Bloomberg Dollar Spot Index, a gauge of the currency against 10 major peers, added 0.1 percent after jumping 0.8 percent on Wednesday, the most since Nov. 6.

Precious Metals

Bullion has retreated from a 15-month high set in early May as investors assess the likelihood of higher U.S. borrowing costs, which tend to hurt gold demand. The April minutes indicated most policy makers said a hike would be appropriate in June should the U.S. economy continue to improve.

Gold futures for June delivery slipped 1.5 percent to settle at $1,254.80 an ounce on the Comex in New York, after touching $1,244.60, the lowest since April 28.

Other Headwinds

Pressure from the greenback is adding to other headwinds for some commodities. Crude futures slid as much as 3 percent in New York after falling from a seven-month peak on Wednesday, as U.S. stockpiles unexpectedly increased. Concern about the strength of Chinese demand helped send copper and other industrial metals lower. Wheat futures in Chicago lost 2.3 percent.

It’s also taking the gloss off of a rebound in the shares of the companies that mine, drill and farm the world’s raw materials. BHP Billiton and Anglo American Plc helped lead mining company stocks lower, with an index of 18 base-metal producers tracked by Bloomberg Intelligence declining 0.7 percent. Glencore lost 3.6 percent.

“The common denominator is the stronger U.S. dollar, which has been pulling the commodity prices lower,” said Norbert Ruecker, head of commodity research at Julius Baer Group Ltd. “Within different commodities markets, a lot of the highest-cost production is in emerging markets. A big strengthening in the dollar makes that emerging-markets production cheaper.”

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