The current strength of the U.S. dollar has had a direct effect on the recent price of commodities. As explained by Chuck Kowalski, Commodities Expert for about.com, “commodities typically follow an inverse relationship with the value of the dollar. When the dollar strengthens against other major currencies, the prices of commodities typically drop. When the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.”

Why? There are many factors, but one of the main reasons is that commodities traded around the world are priced and often purchased in U.S. dollars. As further explained by Kowalski, “When the dollar strengthens, commodities therefore become more expensive in other “non-dollar” currencies.” This obviously has a negative influence on whether other countries buy. When the dollar weakens, commodity prices in other currencies move lower which increases demand. This has a direct affect on real GDP in emerging markets and our pocketbooks as well, as the cost of food and energy are parts of this market segment.

Regardless of where we place our investments, the strength of the dollar and the performance of the commodities market eventually has an effect on us all. Because of the effects of currency exchange rates, supply and demand and the overall health of the global economy, those investors who currently have, or plan to include commodity exposure as an alternative investment should first make certain that the rest of their portfolio is balanced, and well diversified. Your FAS financial advisor can help navigate the choices at hand.