Weaker commodities may be dollar's silver lining

By Toni Vorobyova - Analysis

LONDON (Reuters) - A commodities selloff and consequent dollar rally proved short-lived last week but it shows that softer metals and oil prices may yet prove the silver lining for the beleaguered U.S. currency.

The dollar suffers from expensive oil due to the high levels of energy consumption in the United States, while the loose U.S. monetary policy in recent months has created an increased supply of the currency that overseas buyers need to pay for oil.

At the same time the euro and gold -- and increasingly oil too -- are seen as inflation hedges: the euro due to the European Central Bank's inflation-fighting focus; gold because it has long been a historical store of value; and oil because it has been a driver of rising consumer price inflation.

After setting record peaks on Monday last week -- the euro above $1.59, gold above $1,000 an ounce and oil above $100 a barrel -- all three retreated, with the move accelerating on Thursday.

That day, the 1.3 percent sell off in euro/dollar was blamed on weakness in gold and oil prices, as investors cashed in on recent gains in these assets to shore up loss-making positions in other assets.

The subsequent recovery in the euro and gold suggests the selloff may have been exaggerated by investors adjusting their positions before the long Easter weekend in much of Europe and the United States.

But analysts say the move could be a harbinger. "If the investment environment and margin calls were behind the commodity fall last week, we are betting that later in the year the macro story will really come through to bring oil down and maybe provide the dollar with a little bit of support," said Chris Turner, head of FX strategy at ING.

ING estimates that bullish bets on commodities account for at least 5 percent of the gains in euro/dollar so far this year. Any reversal could lead to an equivalent fall in the currency pair, helping it to meet ING's year-end forecast of $1.50.