What Affects Commodity Prices

The US dollar determines the pricing mechanism for most commodities such as iron ore, pig iron, scrap metal, coking coal and zinc. This is because the dollar is the world's reserve currency. Essentially, there is an inverse relationship between the US currency and commodity prices. The rise in the dollar depressed commodity prices in 2015. In addition, the outlook for higher US interest rates has added additional pressure on prices in many commodity markets.

The US economy continues to grow at a moderate pace, making the dollar attractive as an investment and reserve currency. This will support the dollar in 2016 as well. In addition, the US central bank announced that they are planning further increases in interest rates in 2016.

The US Federal Reserve has pledged throughout 2015 that interest rates will rise. Finally, it delivered on a promise in December when the central bank raised the federal funds rate by 25 basis points for the first time in nine years. While growth was nominal and rates were raised from zero, the move was significant in many markets.

In Europe and China, interest rates continue to fall. Thus, on a relative basis, rising US interest rates support the dollar against other currencies. This inherently provides a bearish trend in commodity prices. In addition, higher US interest rates increase the value of stocks of goods. As a stronger dollar drives down commodity prices, so does higher US interest rates. These two factors put pressure on commodities, which eventually bottomed out in 2015.

However, 2016 is likely to be the same, and weak commodity prices will continue. Experts predict a continuation of lower highs and lower lows in this class in 2016.