The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related exchange traded fund, is up nearly 3% this year, an ascent boosted by the weak U.S. dollar. The The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the exchange traded fund proxy for the U.S. Dollar Index (DXY), is off 3.2% this year.
UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The ETF’s struggles to start 2018 are prompting some traders to boost bearish positions on the fund. The dollar’s bearish gyrations are proving to be good news for oil and other commodities ETFs.
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“Copper, palladium, and more recently platinum and gold have all seen a pickup in the last three months following the more pervasive dollar weakness,” reports CNBC. “This is a huge relief for commodities exporters, particularly across many natural resource-dependent countries in South America and Africa, which saw their economies tank when commodity prices plummeted in 2015.”
The $2.48 billion DBC tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which “is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world,” according to PowerShares.
Commodities currently on DBC’s roster include West Texas Intermediate oil, Brent crude, gasoline, gold, silver, wheat, soybeans, corn, natural gas, sugar, aluminum, zinc and copper.
“Ultimately, the direction of the dollar remains a key question for many of these commodities,” according to CNBC. “This is because the dollar is the benchmark for pricing and buying commodities, so a weak dollar means it costs more dollars to buy commodities and a lesser amount of the currencies of the resource-producing countries. Conversely, a strong dollar often decreases the dollar price of commodities.”
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs.
For more information on the commodities market, visit our commodity ETFs category.