China’s economic heft means that any economy-boosting measures that Beijing rolls out will have ramifications for US dollar-denominated commodity prices. But never more so than when, as now, commodity prices are already high , driven by a global post-pandemic economic rebound and, more recently, by supply reorientations occasioned by Western reactions to Russia’s invasion of Ukraine. Add in tighter US monetary policy , which ordinarily enhances the dollar’s allure to investors, and alarm bells should start to ring around the global economy. No one should be under any illusions. The decisions made in Beijing and Washington in regards to the Chinese and US economies will have knock-on effects worldwide, which many countries will find hard to handle. China remains wedded to its dynamic zero-Covid policy and is equally determined to use its fiscal and monetary toolbox to mitigate the economic impact of coronavirus containment measures. Data released on Saturday, showing China’s official manufacturing purchasing managers’ index at 47.4 in April – down from 49.5 in March and the lowest reading since the beginning of the pandemic – underlines the gravity of the situation. It is against this backdrop that the unveiling of new infrastructure investment plans last week by China’s Central Financial and Economic Affairs Commission, after a meeting at which President Xi Jinping presided, should be viewed. Meanwhile, in the United States, more evidence of rising prices emerged in data released on Friday showing a March increase of 6.6 per cent year on year in the Personal Consumption Expenditures (PCE) Price Index, the biggest jump since January 1982. Given that the Federal Reserve typically pays close attention to PCE data, and with that figure currently way above the Fed’s target of “inflation that averages 2 per cent over time”, the US central bank looks poised to raise interest rates by 0.5 per cent on May 4. Further hikes will surely follow. US Treasuries, yen, gold – are any safe havens today? The upward trajectory of US interest rates, especially when local conditions elsewhere mean other central banks are taking a less hawkish approach or remain committed to ultra-accommodative monetary policy, has supported the dollar on the foreign exchanges in recent months and should continue to do so. The ebb and flow of market sentiment will prompt periodic US dollar sell-offs but the general “bid” tone underpinning the greenback should persist, not least versus the Japanese yen. Despite the yen hitting a 20-year low against the US dollar last week, the Bank of Japan reiterated on Thursday its commitment to its ultra-accommodative yield curve control policy of keeping 10-year Japanese government bond yields “at around zero per cent”. It stated that it would purchase, every business day, an unlimited amount of 10-year government bonds at a yield of 0.25 per cent. There is some concern at Japan’s Ministry of Finance over the pace at which the yen has been weakening but nevertheless, the currency markets can still rationally conclude that the ministry’s capacity to affect the situation is limited by a central bank yield curve control policy which presently lends itself to yen weakness in general and versus the US dollar in particular. Such a conclusion could well lead markets to again exploit the yen as a funding currency, selling it against higher yielding currencies, or even selling the yen for commodities to capitalise on rising commodity prices while minimising the day-to-day costs of running that exposure. In a league table of currencies, this scenario favours the US dollar first and Japan’s currency last, with the Chinese yuan in between , as Beijing seeks to keep the renminbi competitive against the weaker yen. But the knock-on effect of China’s new infrastructure investment plan then also comes into play. That plan can only result in increased Chinese demand for already highly-priced US dollar-denominated commodities, a prospect that invites markets to position themselves for further commodity price gains through the establishment of new, perhaps yen-funded, speculative trades. As those US dollar-denominated commodity prices go yet higher, the result will be a weaker greenback against those commodities, even as the US dollar outperforms on the currency markets. That’s a real dilemma for countries whose currencies are weakening against the dollar but who must still source greenbacks to purchase increasingly expensive US dollar-denominated commodities. But even higher US dollar-denominated commodity prices may yet transpire with China ramping up infrastructure investment, the Fed embarking on a series of US interest rate hikes, and markets having the option of the yen to fund speculative trades that seek to capture such price action. Neal Kimberley is a commentator on macroeconomics and financial markets