What a difference a year makes. In 2017, the U.S. dollar was weak and the prices of commodities, metals and oil were strong. Now the strength of the U.S dollar has wreaked havoc on commodities, metals and oil. The ongoing trade conflicts and rising U.S. interest rates have strengthened the dollar, which has in turn made commodities more expensive in other currencies.
That’s because most commodities trade — even internationally — in U.S. dollars because it tends to be stable. When the dollar is strong, it takes more pesos, lira or euros to buy the same amount of the commodity. When they become more expensive, demand for them tends to drop. And less demand means their price tends to fall.
The carnage is widespread. Sugar and coffee have declined to a low not seen in more than a decade. Sugar has fallen more than 30 percent this year, making it the worst-performing commodity. Oil has dropped more than 10 percent from its high. Prices for other soft commodities such as cotton and frozen concentrated orange juice dropped significantly last week.
Metal prices have slumped across the board over concerns about the possibility of a trade war between the United States and China. The price of copper touched its lowest level in a year, dropping some 20 percent. Prices for zinc dropped by as much as 6 percent, pushing its price on the London Metal Exchange down to its lowest level since June 2017. Nickel, a metal used in stainless steel and electric car batteries, has declined some 15 percent from its high.
The drop in commodities’ prices has hurt the economies of the countries that produce them. The economy of Brazil, the world’s eighth-largest, is expected to contract 2 percent next year in large part because it is the world’s largest producer of both coffee and sugar.
The strength of the dollar also has hurt the currencies of other countries.
Why should we be concerned? The strength of the dollar has led to such a precipitous decline in the currencies of China, Brazil, Russia, India and Turkey that economists have concerns about global economic health.
Last week, the Turkish lira suffered its biggest one-day decline ever after the U.S. doubled tariffs on its steel and aluminum. Economists say that Turkey’s economic crisis has been caused primarily by mismanagement by President Recep Tayyip Erdogan’s mismanagement — unsustainable foreign borrowing, cronyism and huge public works projects with little economic return.
The Indian rupee recently set an all-time low against the U.S. dollar. According to the latest data released by its trade ministry, India’s trade deficit hit a five-year high of $18.02 billion in July. This is mainly because of the surging cost of oil imports — which remember is paid for in dollars — which grew by over 57 percent year-over-year, to $12.35 billion.
As the Chinese yuan has fallen to its lowest level in more than a year against the U.S. dollar, China’s economy has been slowing. Worries about its high debt levels persist. The Shanghai stock market is down 25 percent from its high.
While it is too soon to draw a conclusion, new data from the World Bank suggest that the United States’ policies on interest rates and trade could drag down global growth and create long-term economic fallout comparable to the 2008 recession. Developing countries would be the most vulnerable, but advanced economies also would be affected. The World Bank warned that a worldwide hike in tariffs would have “major adverse consequences for global trade and activity.”
According to The New York Times, an internal report prepared by the White House Council of Economic Advisers showed that tariffs would be detrimental to U.S. economic growth.
Economists, academics and trade experts confirm the fears of CEOs, manufacturers and leading business groups that our robust growth will slow if our global trading partners’ economies stumble.
Originally published in the Sarasota Herald-Tribune
