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    Home»Commodities»Commodities Are Usually Priced In Dollars, Yes, But This Does Not Mean What You Think It Means
    Commodities

    Commodities Are Usually Priced In Dollars, Yes, But This Does Not Mean What You Think It Means

    December 5, 20143 Mins Read


    It’s entirely true that commodities are usually priced in dollars. And it’s also true that when the value of a currency falls then internationally traded commodities become more expensive to people with that falling currency to pay for it. But that’s not quite the same as saying that a rising dollar makes commodities more expensive. However, that is what they seem to be saying here in the Wall Street Journal:

    The dollar’s gains are intensifying declines in commodities including food, metals and especially oil, which is down nearly 40% since mid-June. Sluggish growth in Europe and Asia is undermining demand for these goods, leaving markets flooded with extra supply. Most commodities are priced in dollars, so consumers and companies outside the U.S. see their buying power shrink when their currencies weaken.

    Sure, it’s true that prices for most commodities are expressed in dollars. And it’s also true that if the oil price is $100, you have euros that you want to use to pay for oil and the euro falls against the $ then you’ll have to pay more euros for that $100 to buy the oil. However, that’s not the same, not the same at all, as saying that a rising dollar then makes commodities more expensive.

    For the price of a globally traded commodity (like oil) is determined by the global supply and global demand for oil. It is not determined by the price of dollars.

    Think of it this way. We’ve a Russian pumping oil and selling it to a European. They use $ as their unit of account. So, the $ rises against both the ruble and the euro. This means that Russian is getting more rubles for his oil: he’s willing to supply more. The European has to pay more euros for his $ and thus has a lower demand. Higher supply and lower demand means that the price will come down. Until the two are in balance again. So, for a truly global good, a rise in the $ doesn’t increase the prices to everyone with their own currencies. Instead (and we can get more sophisticated on this by looking at elasticity of supply and demand etc) as the $ rises then the price denominated in $ falls.

    There’s a secondary effect where the rising $ makes oil look cheaper to Americans, who earn in $, thus raising global demand but this is going to be much smaller than the effect on everyone else in the world and their various supply and demand curves.

    Yes, oil and other commodities tend to get traded and priced in US dollars. But this doesn’t mean that their price is anything other than very marginally affected by the price of the US dollar itself. And this importance of this point is not really about this particular retailing of the story. Rather, it’s the point that tells us that switching oil trading (as Putin and before him Saddam have both suggested) to euros will have nothing bar the most trivial effects on anything of importance. Just because commodities are priced in dollars doesn’t mean that a change in the price of the dollar changes the price of the commodity. Rather, the price of the commodity in dollars will change to reflect the change in the price of dollars.



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