The Impact of Fluctuating exchange Rates on World Metals and Mineral Prices

The extended weakness of dollar-denominated commodity prices during the past four years has often been attributed to, among other factors, the strong rise in the value of the dollar, and many U. S. producers have hoped for a recovery in metals and minerals prices once the dollar weakened in foreign exchange markets. The recent turnaround in dollar strength may put this view to the test quite soon. Hence a review of the role of exchange rate changes in the determination of the prices of world-traded metals and minerals may be timely. This paper has three parts. Part I reviews the recent summary record of price movements in commodity and foreign exchange markets. Part 11 reviews the distinct ways in which exchange rate changes influence the supply and demand sides of a representative commodity market. Part III then more closely examines copper and aluminum prices to highlight the potential differences in the effects of exchange rate changes for commodities whose production is dominated by geology and commodities which are processing-dominated. The paper also contemplates the likely implications of these differences for commodity prices in the case of a decline in the trade-weighted dollar. The evidence suggests that the degree of recovery for dollar- measured commodity prices may be very different for differing goods. And it may be the case that some commodities whose prices appear to have been most affected by exchange rate influences may show the least recovery in response to a fall in the trade- weighted dollar.