The impact of U.S. dollar movements and U.S. dollar states on non-perishable commodity prices

This paper investigates the impact of U.S. dollar movements and the state of the U.S. dollar (overvaluation and undervaluation) on 15 non-perishable commodity prices. Using a structural vector autoregressive (VAR) model, we find an asymmetric effect. Movements of an overvalued U.S. dollar do not show an effect on commodity prices, while movements of an undervalued U.S. dollar indicate a statistically significant negative impact on commodity prices in the short-run as well as in the long-run. The finding might be brought about by agents’ expectations that an undervalued strengthening U.S. dollar continues to appreciate as it seeks its way back to equilibrium. Commodity exporters may increase their supply in expectation that they will continue to receive more domestic currencies when selling at U.S. dollar prices. On the demand side, however, the effect of a strengthening U.S. dollar may be offset by the fact that the U.S. dollar is currently undervalued.