I mentioned last week the group of essays at McKinsey’s What Matters website dealing with current topics in global currency, particularly the U.S. dollar. In one essay, Rakesh Mohan writes:
“The world is stuck with the United States and the United States is stuck with the use of its currency as the premier reserve currency for the present. But both are threatened. For the dollar to continue in this role, its value has to exhibit greater stability than it has in the past. Thus the fiscal and monetary policies of the United States also need to inspire greater confidence than at present. US monetary policy has been far less consistent than in other advanced countries in the years since Volcker presided over the Fed, resulting in greater swings in US interest rates and exchange rates than may be optimal for the rest of the world. The high volatility in commodity prices, particularly that of oil, is also related to these swings, which then feed back into the system, increasing the demand for foreign exchange reserves.”
Yesterday, The Financial Times reported on the steep rise of late in soft commodities. The chart from the article is below.
It is tough to disentangle the causes of this rise in commodity prices. As the FT explains, there are market-based reasons for some of the increases, such as bad weather, poor harvests, or a lack of investment, but the fact that so many commodities are rising in sympathy with one another also suggests that Mr. Mohan’s point above deserves attention. Dollar rallies and swoons of an historical nature are likely creating havoc for executives, making it difficult to manage manufacturing chains and inventories. These pressures should lead us to be extremely cautious when evaluating the projected earnings of large, complex, global businesses. With so much uncertainty in the commodities markets – much of it directly associated with fluctuations in the dollar – we will likely see in 2010 many companies wildly miss their earnings targets, both for good and ill.
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