Higher Dollar And Higher Grains?

Futures market analysts are scratching their heads over the fact that during the past month both commodities in general and the US dollar have rallied strongly in value. Typically, traders expect the two to trade inversely—a strong dollar means cheaper grains and vice versa. That type of logic may apply in the micro-economic sense, but today we are dealing with an economic problem that does not distinguish among international borders.

The United States led the world into today’s economic slowdown and the US must lead the world out of it. For that to happen, the dollar must strengthen relative to all other global currencies. Remember, the United States remains the dominant consuming engine of the global economy. The more the US can purchase from abroad, the faster the global recovery will occur. A strong dollar becomes a “stimulus package” to exporters of all types of goods. At the same time, the cost of such products to the US economy goes down, offering yet another stimulus to the US.

Commodities are increasing in value, generally, because investors perceive that recovery is just around the corner. While government economic reports confirm how bad things were in the months just past, commodities values indicate that the outlook ahead is brightening. The anticipation of stronger demand pushes raw materials values up.

Certainly there are exceptions to this trend. Lumber continues to decline in value as housing construction remains in the doldrums. But copper, a key component in numerous products, including new homes, has rallied since December 26. Coffee, much of which is consumed in expensive coffee bars, apparently set a low on December 5, along with corn and soybeans. It has been in an erratic upward trend since then.

Crude oil is the most obvious indicator of rising commodity prices, with values having risen more than 40% from their December lows. This rally has added to gains in corn, soybean and ethanol futures. With predictions of a crude oil rebound to the $75 per barrel area, it is unlikely that higher energy costs will significantly impede economic recovery. This equates to gasoline pump prices of less than $2.50 per gallon. It wasn’t until gasoline exceeded $3.00 that drivers began to really feel the pinch of rising fuel costs.

With commodities pointing toward renewed economic growth in the months ahead, government’s best action now may be to stay out of the way and do nothing to impede recovery. Trillion-dollar stimulus programs that add to federal debt and weaken the dollar will only delay recovery. As usual, Congress will enact dramatically flawed legislation at exactly the time that it is no longer warranted.