Commodity market watchers, obsessed for much of 2004 with rising crude oil prices, were taken by surprise this week as they returned after the new year break to a sharp fall in base metal prices.

An unexpected rally for the US dollar sparked initial selling activity during Asian trade on Tuesday. With sell stops starting to trigger as London traders arrived, the whole complex moved quickly and sharply lower.

But since falls in October, short-dollar/long-commodity positions had come back into play after increasingly hawkish comments from US officials regarding the structural imbalances in the economy.

"This resulted in record short-dollar positions at the end of November and the rebuilding of long positions in commodities," said Alan Williamson, metals strategist at HSBC.

He added: "Some of the short-dollar positions have since been unwound, but the funds remained massively overweight commodities, despite increasing evidence that the global industrial cycle has turned."

So a fall in prices was overdue, even as the dollar began its rally on Monday. But the severity of the sell-off came as a complete surprise. There was a near-absence of buying interest in spite of aluminium falling more than 8 per cent, copper down close to 8 per cent and a more than 9 per cent fall for lead.

As the dollar gained another 2 cents against the euro on Friday, encouraged by comments by John Snow, US Treasury secretary, metals slipped further. By late trade on Friday, aluminium stood at $1,814 per tonne, down more than 7 per cent on the week; copper, at $2,975.5 per tonne, was off 5.5 per cent; and lead, at $913.50 per tonne, was 9 per cent lower over the week.

Weather was an important factor in determining the movements of oil prices this week. The belief at the start of the week that the relatively mild weather in the northeast of the US at the end of December would lead to a build-up of heating oil stocks dragged the price of crude lower. But on Thursday the price spiked 5 per cent after data showing a larger-than-expected drawdown of natural gas supplies pushed investors to cover short positions.

By the close in New York, Nymex WTI for February delivery was 13 cents lower at $45.43 per barrel, a rise of 5 per cent on the week. Brent crude gained 7 per cent to $43.18.

Gold was slightly stronger at $418.40/$418.90, a fall of 4.4 per cent on the week.

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