Commodities Climb as the Dollar Falls off the Back of the Fed’s Decision

look out for potential inflation trades

March 19 (Bloomberg) — Copper climbed to a four-month high and crude oil, wheat and soybeans advanced on speculation the Federal Reserve’s debt purchase plan aimed at bringing down borrowing costs may revive growth in the world’s largest economy.

Commodities gained as the dollar slumped to a two-month low against the euro after the Fed said it planned to buy as much as $300 billion of U.S. government bonds and increase purchases of mortgage bonds, expanding its balance sheet by as much as $1.15 trillion. The move may loosen credit and boost home sales.

“Markets have become more optimistic about the outlook for the U.S. economy in anticipation that this new policy will improve things,” said David Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. “The U.S. dollar has weakened quite dramatically.”

Copper for three-month delivery advanced as much as 3.3 percent to $3,880 a metric ton on London Metal Exchange, the highest since Nov. 11, before trading at $3,860 a ton at 3:53 p.m. Singapore time. Crude oil for April delivery rose as much as $1.69, or 3.5 percent, to $49.83 a barrel, nearing $50 for the first time in two months.

Copper is an indicator for the world economy and sets the pace for other industrial metals because an average of 400 pounds (181 kilograms) is used in homes and 50 pounds in cars, according to the Copper Development Association.

‘Last Resort’

“This plan to buy debt seems to be one of the last resorts by the Federal Reserve to resuscitate the U.S. economy,” Yang Zhenqiang, analyst at Yide Futures Brokerage Co., said from Tianjin. The U.S. is the second-largest copper user after China.

The Dollar Index may drop for an eighth day, the longest stretch in a year, against its major trading partners after falling yesterday by the most in 23 years as the Fed prepared to flood the market with dollars as part of the debt buyback.

“Quantitative easing on such a large scale can only mean near-to-medium term inflation, which is supportive of commodities,” said Yang. Quantitative easing refers to using injections of funds into the economy as the main policy tool.

Gold, which usually climbs when the dollar drops and inflation expectations increase, fell 1 percent today to $932.95 an ounce as the rally in global equities reduced its appeal as an alternative investment. The precious metal jumped 3.6 percent yesterday, the most since Jan. 23, on the Fed decision.

Corn, soybeans and wheat gained on the outlook for increased demand for U.S. crops. May-delivery wheat advanced as much as 2.5 percent to $5.4325 a bushel. Soybeans for May delivery rose as much as 3 percent to $9.42 a bushel.