One of the most enduring perceptions in global markets is about the inverse relationship between the US dollar and commodity prices. In fact, such an inverse relationship and of the causation รข€“ running from the dollar to commodities - is considered almost axiomatic particularly when the dollar is on a weakening mode. Headlines such as "Tumbling dollar lifts metals on LME", "Gold hits new high as dollar crashes" and "Weaker dollar to push crude higher" are well reflective of this widely held view.
How valid is this perception? Is it supported by price movements in the dollar and commodities over long periods of time? Going beyond the validity of this relationship at the level of financial/commodity markets (from a trading perspective), how significant is this question at the level of economic policy formulation? If it can be established that the perceived dollar-commodities link is tenuous, at best, will that provide any signal for policymakers, particularly in emerging market economies (EMEs), such as India?
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