Oil, corn, pork bellies, soybeans, wheat, steel.  It’s all priced in dollars.

Every commodity you can think of trades on the world markets, but every single price you can find will be quoted in dollars.  The dollar is the universal standard of measure of value.  Each commodity can be traded in every country and every market but the universal standard is the US Dollar.

This means that for foreign consumers, the daily fluctuation in commodities is further multiplied by the foreign exchange markets.  While Oil makes record highs in US Dollars, for Europeans it’s looking pretty cheap at 66 Euros to the barrel.   If we were in 1998 eurodollar exchange rates, the price of a barrel of oil today would be 120 Euros.

Consumers wholesale prices rose by 7% year over year.  This basically outlines an increase in the price of metals, plastics, or in general a 7% increase in the cost of most commodities.  The basis of comparison is the US Dollar, so these increases are only seen by US consumers.

When the US Dollar falls against other currencies it means that the world can buy commodities at a lower price.  If the US Dollar falls 50% against the Euro, Europeans can purchase oil at half the old price.  It is likely that Europeans will make up for the discount by buying more.  When oil is cheaper for you, why not buy more?  If oil was $50 a barrel in the United States, chances are that people would consume more oil.

The most important thing in understanding the commodity boom is understanding how prices work.  All commodities are shown in dollars, thus the rapid boom in commodity prices is somewhat due to a weakening dollar.  The commodity bubble isn’t really much of a bubble, it’s just the difference in exchange rates.  Commodities are the best way to hedge a falling currency.