The prospect of further monetary stimulus from the European Central Bank has added to mounting bad news for commodity prices which already face the threat of a rising United States dollar if the Federal Reserve lifts interest rates next month.
All things being equal, a higher US dollar – if it is not already priced-in – makes oil, copper and iron ore less affordable for buyers funding their purchases in other currencies, especially those in vulnerable emerging markets prone to currency depreciation and foreign capital flight.
Commodity prices have been decimated in 2015 but it has taken a long time since the commodity cycle peaked for the big producers to become ensnared in a bear market.
This year markets finally responded because of higher production volumes, slowing investment in China hurting demand, the devaluation of the yuan and the US dollar’s stop-start rally. The US dollar is 12.52 per cent higher than it was at the start of the year against a basket of major currencies, according to Bloomberg.
If the European Central Bank advances its €1.1 trillion ($1.7 trillion) stimulus program, and the euro falls, it is another factor supporting a higher greenback.
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