US monetary policy contributes to global commodity prices in two ways. Consider first expansionary monetary policy through interest rate cuts. This is likely to boost global demand for all goods and services, including commodities, because expansionary US monetary policy will boost US demand more than it lowers demand in the RoW. A boost to global demand will be reflected, in the short run, in a greater increase in commodity prices than in core prices because of the greater flexibility of commodity prices. Now consider expansionary US monetary policy through additional QE. Vast amounts of liquidity in conjunction with near-zero nominal interest rates and negative real interest rates means that the demand for risk assets, land, real estate, equity and commodities increases. This is especially likely to be true if the additional liquidity injected into the US and global economies is in the form of the dominant global reserve currency. Finally, the response of the rest of the world to the US monetary expansion may, if the RoW authorities try to prevent the appreciation of their currencies that the markets want as a result of the relative loosening of US monetary policy, lead to enhanced credit expansion in the rest of the world as well, as foreign exchange reserves are accumulated in an effort to keep the exchange rate down and as sterilization of these reserve inflows is only partially successful.
In brief, there is no contradiction between the view that the US pursues a weak dollar policy and the view that global commodity price inflation is due mainly to factors other than US monetary policy.
We also agree with the repeated statements by Fed officials that many emerging market policy-makers have tried, since the recovery started, to limit the appreciation of their currencies through a variety of means, and that this attempt to suppress currency appreciations warranted and wanted by the markets may well be a major, or perhaps at times even the main reason for EM currency discomfort. But the fact that many emerging markets are leaning heavily against market-driven exchange rate appreciation pressures in no way contradicts the fact that US monetary policy is one of the key drivers behind these pressures. And if exchange rate overshooting is indeed a common phenomenon, as we believe it to be, then not all policies aimed at preventing the full market-warranted upward pressure on the currency from being reflected in the actual value of the exchange rate are necessarily perverse or distortionary.
Source: The ‘Strong Dollar’ Policy of the US: Alice-in-Wonderland Semantics vs. Economic Reality, Global Economics View, Citigroup Global Markets, 26th May 2011 (page 31)