Commodities priced in dollars still produce gains in local currencies

We have received a number of comments regarding the recent post called "No shortage of those who want to see the dollar lower" that points to the fact that numerous parties, particularly the commodity producers, would love to see the dollar lower. Many readers however argue that because commodities are priced in dollars, the dollar declines would offset the commodities rally when converted to native currencies. Therefore they argue that producers should be indifferent to dollar declines and in fact would want a stronger dollar to stimulate demand.

In practice however this argument just doesn't hold up. Consider the first half of 2008 that saw a broad commodities rally triggered by a weak dollar. Here are the facts:

* Dollar move against a basket of 6 currencies: ---- down 4.5%
* Copper priced in Australian dollar: ---- up 12%
* Aluminum priced in Australian dollar: ---- up 18%
* Oil priced in Russian Ruble: ---- up 50%

This year we have a similar story developing. The sustained dollar slide started in May, and here are the results since then (May-1 to Sep-9):

* Dollar move against a basket of 6 currencies: ---- down 9%
* Copper priced in Australian dollar: ---- up 19%
* Aluminum priced in Australian dollar: ---- up 4%
* Oil priced in Russian Ruble: ---- up 16%

Similar results can be obtained using other producer currencies and commodities. The conclusion here is that when we experience a sustained commodity rally, the rally more than offsets any dollar declines, generally producing significant gains in local currencies. That's why most commodity producers (including those in the US) are interested in a weaker dollar (although many will not publicly admit that).