Chart of the Week: Drop in Dollar Lifts Commodities

May.25.09 | About: ELEMENTS Rogers (RJI)

One of the market-moving stories of the week was a decision by Standard & Poor’s to lower their outlook for AAA-rated sovereign debt of the United Kingdom from stable to negative. This action caused ripples in the currency markets, with the dollar coming under pressure after investors such as Bill Gross of PIMCO expressed concerns about the mounting U.S. deficit and potential future risk to the AAA credit rating for U.S. debt.

By the end of the week the dollar was at a four month low against the euro and commodities were up sharply, partly because commodities are seen as an effective hedge against inflation.

In the chart of the week below, I have captured a chart of the Rogers International Commodity Total Return Index ETF (NYSEARCA:RJI) versus the U.S. dollar. The chart shows that the dollar peaked in mid-December and has declined steadily to a current level that is comparable to where the dollar was trading in mid-September.

The drop in the dollar has helped to lift prices of dollar-denominated commodities and provided some assistance to commodities as they formed a bottom in mid-February. During the course of the past three months, commodities have had two up trending periods, each of which was followed by a consolidation period. With the dollar breaking down and falling below support at the end of the week, commodities could be preparing for another upward leg soon.

Click to enlarge

Click to enlarge

[source: StockCharts]