Strengthening Dollar Seen by UBS Damping Demand for Commodities

Jan 21, 2014 7:26 am ET

Jan. 21 (Bloomberg) -- A strengthening U.S. dollar will damp demand for commodities this year, according to UBS AG.

The greenback, at a four-month high against 10 major peers, will strengthen further because of the Federal Reserve’s tapering of stimulus, the shale oil and gas “boom” and a growing trend for businesses to move back to the U.S., the bank said in a report dated yesterday. That will damage conditions in emerging markets and commodity demand, according to the bank.

“We believe we are about to see a cyclically and structurally stronger dollar,” Julien Garran, a London-based analyst at UBS, wrote in the report. “A strong dollar will prove to be a major problem for commodities and emerging markets in 2014.”

Investors dumped emerging markets and commodities at a record pace last year amid concerns slowing growth there will curb demand for raw materials and a stronger dollar will add to the headwinds. Investors withdrew a record $43.3 billion from commodities and $31.4 billion from emerging-markets bond funds, the most ever, according to researcher EPFR Global. Withdrawals from emerging markets equity funds were $27.6 billion.

“When the dollar trends higher, and capital flows out of emerging markets, commodity intensity in global GDP growth tends to fall by two-thirds,” Garran wrote. “Historically, trend global copper demand growth has fallen from 5 percent under emerging markets inflows to 1.6 percent under outflows.”

The Bloomberg Dollar Spot Index rose to a four-month high today and is 1.6 percent higher this year. The gauge’s 3.5 percent gain last year was the biggest since 2008. The Standard & Poor’s GSCI Index of 24 raw materials slid 2.2 percent last year, its first drop since 2008, and fell 2.2 percent so far this year.

--Editors: John Deane, Raj Rajendran