Commodity Prices and Strength of the Dollar

Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update discusses rising commodity prices and the strengthening U.S. dollar.

  • The U.S. dollar has strengthened against the euro in light of the unsustainable government debt crisis in Greece and several other euro zone countries.  Today’s exchange rate was $1.27 to one euro.  Just two years ago it was $1.44 for one euro.  This trend will give pause to those from Germany and France who want to buy a vacation home in the U.S., particularly in Florida.
  • It is not only against the euro, but the dollar has also strengthened against other foreign currencies in general based on the reading of Federal Reserve’s broad exchange value of the U.S. dollar (as shown in graph below).  This could be due to global investors seeking ultra-safe assets due to Europe’s economic uncertainties.  The last time the dollar was in high demand was in late 2008 when Lehman Brothers went bankrupt and triggered a nervous breakdown among global financial market investors.
  • Generally a stronger dollar means lower commodity prices, such as the price of oil, because a dollar now commands more purchasing power.  However, the stronger dollar has resulted not in falling commodity prices but rising commodity prices in recent weeks.  That means if for some reason the dollar was to revert back to earlier exchange rates, such as one euro converting at $1.40, then commodity prices could shoot even higher.
  • From the everyday consumer and REALTOR point of view, if the dollar loses some of its purchasing power in relation to other foreign currencies for whatever reason then gasoline prices could go higher from the current national average of $3.38 per gallon.  Based on the recent unusual positive correlation between dollar strength and oil price, which will not be sustained, it is more likely for the price of gasoline to reach $4 per gallon than $3 per gallon in the later months of this year.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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