The value of the U.S. dollar relative to other currencies can partially explain speculative influence on cotton prices. As the U.S. dollar weakens, it can encourage flows of money into alternative financial markets like commodity futures. In addition, a weakening U.S. dollar in theory would stimulate more U.S. exports of physical cotton since it would be cheaper relative to competing foreign cotton. So there is a double reason for cotton markets to get stronger when the U.S. dollar weakens, and vice versa.
The weak dollar/stronger cotton price relationship has generally been the case except during very specific situations like a sustained weakening euro currency (e.g., late 2009/early 2010, and again in late 2011). Since 2015 the notably stronger dollar has been viewed as a headwind to cotton prices. The longer term rally in the U.S. dollar index since August 2014 has been attributed to improved U.S. economic prospects, improved U.S. trade balances, and expectations of higher U.S. interest rates. The impact of Trump administration policies on the dollar remains to be seen.
After rallying to a two year high with an expected Federal Reserve rate cut in early August, the U.S. Dollar Index has trended higher, reflecting dollar strength. A continuation of this uptrend peaked on September 3 and has stabilized since. For the week ending September 20, the U.S. dollar index initially rallied on another Federal Reserve rate cut, albeit with more hawkish sounding outlook. The dollar then weakened again by the week’s end, under the apparent influence of foreign central bank hawkishness.