Commodity price effects on currencies

Using quarterly data on four commodity-exporting countries, we examine the explanatory power of real commodity prices to predict real effective exchange rates, paying particular attention to the separate roles of varied sectoral commodity prices during alternative time periods. We determine that the commodity price effect is nonuniform across countries and commodity sectors and varies over time. The use of fixed-weight price indexes or nominal exchange rates and commodity prices yields heterogeneous commodity price effects. Furthermore, the pattern of commodity price effects is influenced by the presence of macroeconomic conditions, effects of crises, and exchange rates of leading trading partners. These empirical results highlight the challenges associated with explaining diverse currency behaviors across different time periods using a single commodity-price-based exchange rate model. In addition, these findings suggest policymaking assuming stable commodity price effects difficult.