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Weakening Dollar Could Lift Commodities in 2020

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01/15/2020 | 08:15am EST

By Sarah Toy

A softening U.S. dollar could give commodity prices a boost this year.

After a year in which a strong dollar weighed on commodity prices, some banks now predict the U.S. dollar is set to weaken in 2020, dragged lower by expectations that the Federal Reserve will keep interest rates steady after recent cuts. Lower interest rates make a currency less attractive to investors, as they offer lower rates of return.

That could herald good news in 2020 for investors already betting that easing trade tensions between the U.S. and China and a pickup in global growth will lift demand for commodities like metals and crude oil. It could also boost shares of commodity producers such as Freeport-McMoRan Inc. A weaker dollar makes commodities denominated in the U.S. currency less expensive for overseas buyers.

"When there's weakness in the dollar, the usual response is to pick up things that are priced in dollars," said Tai Wong, head of base and precious metals derivatives trading at Bank of Montreal.

Major moves in commodity prices are often sparked by so-called fundamental factors, such as fears of a supply shortage or issues that could affect demand. But those moves can be sharpened or damped by movement in the U.S. dollar.

In the past three months, commodity prices have climbed as the WSJ Dollar Index has slipped 1.8% from its 2019 high in September. Both copper futures and U.S. crude futures have climbed more than 8% during that time, and gold futures recently traded at their highest level since 2013. The Bloomberg Commodity Index has gained 2.3% in the past three months.

Cooling trade tensions between the U.S. and China have also weakened the dollar and boosted commodities in recent weeks. After months of negotiations, the world's two largest economies announced in December they had reached a limited trade agreement. Both sides are expected to sign the deal at a White House ceremony on Wednesday.

The trade war was a major hurdle for commodities, especially copper, said Darwei Kung, head of commodities and portfolio manager at DWS Group. China is one of the world's largest copper consumers and accounts for about half of global demand.

Copper prices sank to a two-year low in August, after an escalation in trade tensions between the U.S. and China threatened to weaken the global economy and dent demand.

The recent progress in trade talks helped push net bets on rising copper prices by hedge funds and other speculative investors to nine-month highs during the week ended Dec. 31, according to data from the U.S. Commodity Futures Trading Commission. They retreated the following week.

"We're very positive on copper in 2020," Mr. Kung said.

Higher commodity prices could also be a boon for producers like oil giant Exxon Mobil Corp. and copper miner Freeport-McMoRan Inc. Shares of both companies have lagged behind the broader market for years.

"We have this great inventory of opportunities, but like other projects in the industry, they require prices higher than today's price to develop," Freeport-McMoRan Chief Executive Richard Adkerson said in August.

-- To receive our Markets newsletter every morning in your inbox, click here.

Write to Sarah Toy at sarah.toy@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BANK OF MONTREAL -0.60% 103.4 Delayed Quote.3.36%
CRB COMMODITY INDEX 0.10% 195.01 End-of-day quote.0.00%
EURO / US DOLLAR (EUR/USD) 0.03% 1.10217 Delayed Quote.-1.73%
EXXON MOBIL CORPORATION -2.38% 64.74 Delayed Quote.-7.22%
FREEPORT-MCMORAN INC -7.94% 10.9 Delayed Quote.-9.76%
GOLD -0.06% 1580.208 Delayed Quote.4.31%
LME COPPER CASH -3.17% 5779 End-of-day quote.-6.27%
LME NICKEL CASH -2.62% 12650 End-of-day quote.-10.12%
LONDON BRENT OIL 0.36% 59.11 Delayed Quote.-6.00%
US DOLLAR INDEX 0.11% 97.96 End-of-day quote.1.19%
WTI 0.13% 53.03 Delayed Quote.-9.29%
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