Analysing Commodity Prices: Trend for Crude Oil and Wheat in US Dollars, Euro and SDR

Commodities are currently quoted in US dollars. Their prices move accordingly to a wide range of variables linked to the real economy (demand and supply). The existence of big and liquid future commodity markets also plays an important role in the formation of commodity prices, driven by general macroeconomic outlook rather than commodity-specific factors. On top of this, the fact that commodities are priced in US dollars makes the exchange rate of the US currency a variable that affects the price of commodities itself. For example, in general, since 2000 onwards an appreciation of the US dollar has been accompanied by a fall in the oil price. On the contrary, a devaluation of the dollar usually tends to reduce the price of crude oil in consumer countries. This, however, leads to an increase in real income and demand, hence, even if delayed, in prices.This paper analyses the evolution of prices of two commodities, oil and wheat, in the period 2000-2016, if they were to be priced in different currencies, namely the US dollar, the euro and the SDR. Primary commodities quoted in SDRs would have cost less: their prices would have been more stable since the SDR, with a defined value in terms of the major currencies, diversifies exchange risks.