Commodities and the . Dollar. The inverse relationship between bonds and commodity prices and the positive relationship between bonds and equities have been examined. Now the important role the dollar plays in the intermarket picture will be considered. | 5 Commodities and the . Dollar The inverse relationship between bonds and commodity prices and the positive relationship between bonds and equities have been examined. Now the important role the dollar plays in the intermarket picture will be considered. As mentioned in the previous chapter it is often said that a rising dollar is considered bullish for bonds and stocks and that a falling dollar is considered bearish for both financial markets. However that statement doesn t always hold up when examined against the historical relationship of the dollar to both markets. The statement also demonstrates the danger of taking shortcuts in intermarket analysis. The relationship of the dollar to bonds and stocks makes more sense and holds up much better when factored through the commodity markets. In other words there is a path through the four sectors. Let s start with the stock market and work backwards. The stock market is sensitive to interest rates and hence movements in the bond market. The bond market is influenced by inflation expectations which are demonstrated by the trend of the commodity markets. The inflationary impact of the commodity markets is largely determined by the trend of the . dollar. Therefore we begin our intermarket analysis with the dollar. The path to take is from the dollar to the commodity markets then from the commodity markets to the bond market and finally from the bond market to the stock market. THE DOLLAR MOVES INVERSELY TO COMMODITY PRICES A rising dollar is noninflationary. As a result a rising dollar eventually produces lower commodity prices. Lower commodity prices in turn lead to lower interest rates and higher bond prices. Higher bond prices are bullish for stocks. A falling dollar has the exact opposite effect it is bullish for commodities and bearish for bonds and equities. Why then can t we say that a rising dollar is bullish for bonds and stocks and just forget about commodities The reason lies with long lead times in .
