The foreign exchange market and commodity markets are tightly linked. Prices in one feed into the other through multiple channels that matter to traders, investors and producers. The USD is the currency of settlement for a large amount of the global commodity contracts. This means that the USD and its value on the currency market. will have a large effect on the relative value of commodities. Most currencies will become more expensive if the USD becomes weaker. Since it takes more USD to buy the same commodity. If you trade commodities using futures with another currency of settlement, the value of that currency might be more important.

The inverse correlation between the value of the USD and commodities is one of the reasons why commodities and especially gold are often used as a hedge against inflation and a falling currency.

The price of different currencies can also affect the price to produce different commodities. Which currencies have the largest impact depends on where the majority of that commodity is produced. The value of the Chinese RMB can, for example, have a large effect on the price of rare earth minerals, since such a large percentage of the rare earth minerals are currently produced in China. This is, however, set to change as more mining operations open up in other countries.

Below we’re going to take a more detailed look at how the FX market affects prices of the commodity market. This guide is assumed that you already have a basic understanding of how the FX market works. If not, I recommend that you read more in this Forex Market Guide.

Pricing currency and exchange rate pass through

Most major commodities are priced in USD. That choice means an appreciated USD makes a barrel of oil or a ton of copper more expensive in non USD terms. Importers who pay with other currencies face a higher local cost when the dollar strengthens which tends to reduce demand at the margin. Conversely a weaker USD lowers the local currency cost of commodities and can boost demand. That simple pass through is the first order effect and it operates continuously. It creates a negative correlation in many cases between USD strength and commodity prices because a stronger USD suppresses demand from foreign buyers. The correlation is not perfect and it varies by commodity and by the composition of global demand at a given moment, but the invoicing currency is the plumbing behind much of the day to day interaction.

Commodity currencies and two way feedback

Some national currencies are heavily exposed to commodity moves. The Canadian dollar, the Australian dollar, the Norwegian krone and several emerging market currencies often move with commodity prices because these economies export large volumes of oil metals or agricultural goods. That creates two way feedback. A rise in oil or metal prices lifts the exporting country currency which in turn can moderate local inflation and affect local demand for imports. The stronger local currency can reduce the USD equivalent return for foreign investors in commodity assets based in that country. The feedback loops make correlations time varying. During strong commodity rallies the exporter currency tends to strengthen and that currency move can dampen a further increase in USD denominated commodity prices because some of the economic adjustment occurs through exchange rates rather than physical supply.

Demand side pass through and income effects

Exchange rate swings change real incomes and purchasing power. For a country that imports most of its energy a weaker currency raises household and industrial costs which tends to lower consumption and manufacturing. Lower demand then pressures commodity prices. For commodity exporters a weaker local currency improves exporters revenue in local currency and can make continued production more profitable at lower USD prices. That income channel is slower than the immediate invoicing effect but it is economically important for medium term cycles.

Hedging, balance sheet effects and corporate behavior

Producers and consumers hedge currency and price risk to smooth cash flows. When exchange rate volatility rises hedging costs increase and hedging strategies change. For example a miner or an oil producer that invoices in USD but reports earnings in a local currency will see cash flow swings if the currency moves. Companies adjust capex schedules, delay or accelerate exports, and change dividend or buyback plans. Those corporate responses alter supply expectations and can nudge market prices. In addition large publicly traded producers often run currency hedges or dollar debt that interacts with their balance sheet when exchange rates shift, creating second order effects on investment and production plans.

Interest rates real rates and safe haven flows

Currency moves are tied to monetary policy. Higher nominal rates in a currency tend to attract capital and strengthen that currency. What matters more for commodities is real interest rates and expected policy because they drive the opportunity cost of holding a non yielding asset such as gold. When real rates fall the convenience of holding inventory or owning gold increases and that supports commodity prices. Central bank action that moves FX markets therefore indirectly affects commodities through changes in real rates, financing costs and through risk sentiment. In episodes when risk off behavior dominates, flows into USD and into US Treasuries can push the dollar higher while hurting many commodity prices, though safe haven metals like gold may behave differently because they are also currency hedges.

Futures term structure storage and carry

Exchange rates influence financing costs and the cost of carry. For commodities that are stored and rolled through futures contracts the forward curve reflects storage cost, insurance, and financing. If currency moves raise borrowing costs for producers or traders who finance inventories, the term structure can shift toward deeper contango and that changes roll yields for long holders. Traders who fund inventory in a local currency but hedge with USD futures see their effective carry change when exchange rates move. That effect is technical but it alters incentive to hold stock and therefore affects spot and futures prices.

Speculative flows liquidity and correlation shifts

The FX market is the largest liquid market in the world and it hosts large global flows from macro funds hedge funds and sovereign wealth funds. Changes in those flows move the USD and other major currencies and they often co move with commodity oriented asset flows. For example when global risk appetite rises investors may sell USD funding positions and buy emerging market assets and commodity exposed equities which lifts commodity prices. The reverse happens in risk off episodes. Because speculative capital is mobile the FX market often transmits sentiment quickly into commodity futures and equity markets making correlations move sharply at times.

Trade policy tariffs and capital controls

Exchange rate moves interact with trade policy. Tariffs currency controls or sudden regulatory changes

will all have a direct effect on how much importers have to pay for the commodity. This might force producers to lower their prices due to the price sensitivity of the importers. But it might also drive up prices for end users who buy the products that are produced from those commodities.

There are, in other words, more than just economic factors that can affect the price of commodities. And political decisions can also affect the prices of commodities. How large that effect is depends on how important it is to introduce the tariffs or rather control is in the overall market for that commodity. Changes from small, poor countries that mainly act as importers will rarely have a large effect.
In contrast, for example, U.S. tariffs can have a significant impact on commodity prices.

Practical examples and common patterns

A few recurring patterns help anchor the theory. First many broad commodity indexes show a negative correlation with USD during normal times because a stronger dollar reduces foreign buying power. Second energy and base metals tend to follow global growth expectations and so when the dollar weakens on growth optimism commodities often rally. Third gold often behaves differently since it is both a commodity and a currency alternative; gold benefits from lower real rates and from currency debasement fears so it can rally when the USD is weak or when real rates fall even if the dollar is not moving. These patterns are not rules. Supply shocks weather events and sudden policy moves override currency links in many episodes so always check the proximate driver.

Implications for investors and traders

Manage currency exposure explicitly. If you buy physical or ETF exposure to commodities know whether the instrument has embedded currency risk. When investing in producer stocks check both commodity exposure and corporate currency exposures. Use currency hedges or natural hedges where appropriate. For shorter term trading watch major FX moves because they can lead or coincide with commodity moves. For longer term positions model the income channel and the effect of changes to financing costs and local demand. Finally remember correlations change. Back tests that ignore exchange rate regimes will mis price risk and produce poor sized positions.

Risk controls and tactical checks

Monitor a few indicators before you act. Check the USD index for the immediate invoicing channel. Watch interest rate differentials and real rate expectations for implications to gold and to storage costs. Look at importer country currency moves for demand side signals and exporter currency moves for supply side signals. Adjust position size when FX volatility spikes and revisit hedges before major central bank announcements. Keep margin and funding in mind if you hold futures because exchange rate moves can change margin requirements for participants funded in other currencies.

This article was last updated on: December 12, 2025