Gold & Commodities · Intermediate · 4 min

Commodities and the US dollar

You can explain why most commodities are priced in US dollars, how dollar moves can affect their prices and your returns, and why the link is not stable.

Priced in dollars

A barrel of oil bought by a refinery in Germany, Japan or Brazil usually has its price set in US dollars. The same goes for gold, copper and many other commodities on world markets.

That one convention links commodity prices to the world's main currency. It also adds a layer for every investor outside the US. This lesson explains how the link works, and why it is looser than many assume.

Usually opposite, not always

Most internationally traded commodities use dollar pricing: their benchmark prices are quoted in US dollars. Several mechanisms connect the dollar to those prices. The EIA describes some of them for oil:

Buyers' side: when the dollar weakens, a commodity priced in dollars becomes cheaper for buyers paying in euros, yen or other currencies. That can raise demand and support the dollar price.
Producers' side: producers outside the US who are paid in dollars receive less in their own currency when the dollar weakens, so they may push for higher dollar prices.

The EIA also stresses the limits. The dollar and oil have usually moved in opposite directions, but the relationship is complex, the direction of cause and effect is unclear, and at times they have moved together. In 2022, for example, both oil and the dollar rose. Both can also react to the same global news, such as changes in economic growth, without one causing the other.

For investors outside the US, the dollar matters in a second way. A commodity investment is effectively a dollar investment too, unless it is currency-hedged. The result in your own currency combines the commodity's move and the dollar's move, just as with foreign stocks and bonds.

+5% gold, +5% dollar

A fictional euro investor buys gold worth 10,000 euros.

Over a year, gold rises 5% in dollars.
The dollar also rises 5% against the euro.
In euros, the gold is worth about 10,000 × 1.05 × 1.05 ≈ 11,025, a gain of about 10%.

In a year when gold rises 5% but the dollar falls 5%, the result in euros is about zero. The commodity was the same, the currency decided the outcome.

Common mistakes

Treating the dollar link as a rule. It is a tendency that can break.
Forgetting your own currency. A commodity's dollar price is not your return.
Confusing correlation with cause. Both can react to the same global news.
Ignoring hedging. Some commodity products are currency-hedged, others are not.

The takeaway

Most commodities are priced in US dollars. A weaker dollar often supports their prices, but the link is loose and can even reverse.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the step in which buyers outside the US feel the change.

Tap the chart.

When the dollar weakens, a barrel priced in dollars costs fewer euros or yen, which can lift demand.
2How does the US EIA describe the relationship between the dollar and oil prices?

The EIA notes that the two have usually moved in opposite directions, but that the link is complex and has changed over time.
3Gold rises 5% in dollars, while the dollar rises 5% against the euro. What does a euro investor see, roughly?

1.05 × 1.05 ≈ 1.10. The rise in the dollar adds to the gain for a euro investor.
4Why might a weak dollar push oil producers to seek higher dollar prices?

The EIA lists this producer-side effect as one possible explanation for the link.

of 4 correct.