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Tickers in this Article: UUP, USO, GLD, SLV
On Wednesday afternoon, the Federal Reserve announced it would shuffle $400 billion of its portfolio in an attempt at driving down long-term interest rates in order to invigorate the economy. The Fed cited slow economic growth and continuing weakness in overall labor market conditions. The markets didn't react positively to the statement and closed at their lows for the day.

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The dollar however, reacted positively and the currency as represented by PowerShares DB USD Index Bullish (NYSE:UUP) ETF stands at several month highs. Further, the price action that has developed over the past few months is consistent with bottoming behavior. UUP has been finding support near $21 and volume has been expanding on rally attempts. UUP was able to clear some resistance near $21.75 and while it remains mired in a long-term decline, the recent strength could be pointing to some form of a bottom.



As a result, the price action in the U.S. dollar could have a significant impact on commodities based on the typical inverse relationship. Beyond the dollar effect, the Fed's worries of continued economic weakness may weigh on investors minds and hold back the commodity. Oil, as represented by the United States Oil Fund (NYSE:USO), had already broken down from a base back in August and had been struggling to climb back towards it since then. It is now starting to break down from the small wedge it had been forming and could be headed to new lows. (For more, see Commodities: Introduction)



Gold, as represented by the SPDR Gold Trust (NYSE:GLD) ETF, has actually been holding up after a sharp reversal in mid August. Many expected a swift correction in the metal following the high volume decline, but gold rebounded a few days later to test its highs once again. It did fail at the $185 level again, however, and may be starting to head back lower. GLD has been slowly drifting back and could be headed for a retest of its August lows. With the strength in the dollar, it's possible that GLD heads even lower. Traders will need to closely monitor the August lows to see if GLD can attract buyers.



Silver also weathered the August weakness well, although it remained well below its April highs. Silver remains stuck in a larger range between those highs and the lows set after a spectacular decline in May. The metal, as represented by the iShares Silver Trust (NYSE:SLV), had been gradually rising throughout the past few weeks as it held key support near $32.50. It struggled upon reaching $42.40 on a couple occasions and is starting to see an increase in selling. SLV is starting to fall out of the channel/wedge it had been following and is also under its 20- and 50-day moving averages. The next support level is $37.50 and if that fails to hold, its possible that SLV will decline towards $32.50-$35. (For more, see Is Silver The New Gold?)



The Bottom Line
While it is still far from a certainty to which direction the markets will take next, the U.S. dollar is giving a clear signal of strength. This could have an adverse impact on commodities, and one could argue that it has already started to weigh down on them. Any continued strength in the currency will likely spur the commodities lower, possibly offering great trading opportunities for traders. (For more, see How To Invest In Commodities.)

Charts courtesy of stockcharts.com

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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