Link Between Commodities, the dollar and large caps and small caps stocks

A rising U.S. dollar normally has a depressing effect on most commodity prices. In other words, a rising dollar is normally considered to be non-inflationary. One of the commodities most effected by the dollar is the gold market. If you study their relationship over time, you'll see that the prices of gold and the U.S. dollar usually trend in opposite directions. The gold market, in turn, usually acts as a leading indicator for other commodity markets. So, if you're analyzing the gold market, it's necessary to know what the dollar is doing. If you're studying the commodity price trend in general (using one of the better known commodity price indexes), it's necessary to know what the gold market is doing. The fact of the matter is that all four markets are linked-the dollar influences commodities, which influence bonds, which influence stocks. To fully comprehend what's happening in anyone asset class, it's necessary to know what's happening in the other three. Fortunately, that's easily done by simply looking at their respective price charts.

THE DOLLAR AND LARGE CAPS

Another inter-market relationship involves how the dollar affects large and small cap stocks. Large multinational stocks can be negatively impacted by a very strong dollar, which may make their products too expensive in foreign markets. By contrast, the more domestically oriented small cap stocks are less affected by dollar movements and may actually do better than larger stocks in a strong dollar environment. As a result, a stronger dollar may favor smaller stocks (like those in the Russell 2000), while a weaker dollar may benefit the large multinationals (like those in the Dow Industrial Average.