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Commodities move out of somber on back of US dollar, but challenge of rising COVID-19 cases remains

After days of the rangebound and directionless movement, commodities have shown some signs of life amid persistent weakness in the United States dollar and continuing optimism about the US and Chinese economy.

Gold, which struggled in the $1,670-1,750 per ounce range for the last few weeks, has moved out and tested the highest level since February 26. Crude oil, which moved within the $58-62 per barrel range for the last few days, has now moved closer to $64 a barrel. Copper, which held in a range near $9,000 per tonne, has now tested the highest level since late February.

While the US equity market gained and the US dollar fell on Fed’s dovish stance, bond yields remained at elevated levels. Fed now seems to have convinced bond market players as well that rates may not be raised soon and this led to a correction in bond yields. The 10-year bond yield has slipped from the January 2020 high of near 1.77 per cent to a low of near 1.53 per cent.

The biggest factor supporting commodities is the weakness in the US dollar. The US dollar index has slumped to a four-week low as optimism about the US economy is countered by a decline in bond yields and Fed’s dovish stance. Fed officials including Fed Chairman Jerome Powell have repeatedly played down inflation risks while maintaining that interest rate may remain low for a long time.

Commodities have also benefitted from optimism about the US economy on the back of some upbeat economic readings. US Retail Sales jumped 9.8 per cent in March, the largest increase since May 2020. Initial jobless claims in the week ended April 10 fell by 1,93,000 to 5,76,000, the lowest since March 14, 2020.

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