(Bloomberg) — Slumping energy prices led commodities to a 12-year low as the dollar’s best rally since 2008 reduced the investment appeal of raw materials amid surpluses of everything from oil to sugar.
The Bloomberg Commodity Index fell 1.4 percent to 97.5777, the lowest level since August 2002, dragged down by crude oil and raw sugar. The Bloomberg Dollar Spot Index, tracking the greenback against 10 currencies, is set to climb the most since 2008 this quarter and reached the highest level in data going back to the end of 2004. A stronger dollar tends to deter investment in raw materials.
Commodities are tumbling as economies expand in the U.S. and cool in other nations, driving the dollar higher. The Federal Reserve will hold a policy meeting next week as strength in the U.S. labor market fuels speculation that the central bank will lay the groundwork for higher borrowing costs. The European Central Bank started a bond-buying plan this week, adopting so- called quantitative easing to spur growth. Goldman Sachs Group Inc. said commodities may drop 20 percent over the next six months amid rising supplies.
“The combination of prospective Fed rate hikes versus QE in Europe and Japan suggests that dollar strength can continue,” Nic Brown, the London-based head of commodities research at Natixis. “This stronger dollar inevitably implies downward pressure on the dollar- denominated price of commodities.”
The U.S. unemployment rate fell to the lowest in almost seven years, data showed March 6, while Brazil’s economy will shrink 1 percent this year.
“In previous economic cycles, a strengthening U.S. economy would eventually lead to an improvement in the global economy,” said Brown. “After a rapid expansion of the BRICs, that is no longer a certainty. The structural problems faced by Europe and Japan also suggest that a synchronous global economic recovery cannot be taken for granted.”
