KUALA LUMPUR: Commodity prices rose to fresh highs as the US dollar weakened yesterday against the backdrop of a recovering global economy which triggers the anticipation of rising inflation.

The ringgit was traded at its firmest point in 16 months versus the greenback. Economists said rising prices of commodities such as crude oil, gold, and palm oil could be a positive sign that companies were positioning themselves for a rebound in consumer spending.

At the same time, it is also an indication of investors’ anticipation of rising inflation amid central banks' loose monetary policies to rejuvenate their respective economies. "Both actual price rise and fears of future inflation threaten to put central bankers around the globe in a tough spot, particularly in Asia, which was not badly hit by the credit crisis and where economic growth is generally stronger.

"Indeed, food prices are a big concern in developing countries such as China and India, where food makes up a large proportion of consumer purchases," RHB Research Institute Sdn Bhd economist Peck Boon Soon wrote in a note to clients today.

Crude oil prices for February delivery at the New York Mercantile Exchange climbed to their highest in 15 months at US$83.52 (RM278.96) a barrel at 3.24pm. The hydrocarbon resource pierced the US$80 mark on Jan 4, the first time since October last year, as traders predicted that an economic recovery in the US, the world's largest economy, would fuel demand for the commodity.

Freezing winter conditions in the world's largest energy user have also prompted expectations that demand for winter fuels such as heating oil and natural gas will increase.

Meanwhile, spot rates for gold advanced as much as US$20.15 to US$1,158.40 an ounce at 8.45am before trading lower at US$1,154.28 at 3.34pm. Malaysian crude palm oil (CPO) for March delivery rose to a high of RM2,648 a tonne, up RM22 from last Friday, before falling to RM2,581.

Latest updates by the Malaysian Palm Oil Board (MPOB) show that CPO production in December fell by a monthly pace of 5% to 1.52 million tonnes.

However, combined CPO and processed palm oil stock in December rose 16% to 2.24 million tonnes although the country exported 19% less palm oil compared to a month earlier.

According to Bloomberg, the 2.24 million stockpile was the second highest on record. The record was 2.27 million tonnes in November 2008.

For the full year, output surged 16% to a record 20.5 million tonnes in 2009 from 17.7 million in 2008, taking into account revised data. Exports rose to 15.84 million tonnes, from 15.4 million tonnes in 2008.

According to the newswire, Malaysian palm oil production for the last decade nearly doubled to 143.8 million tonnes from about 76 million tonnes in the previous decade, according to historical data from MPOB.

ECM Libra Investment Bank Bhd foresees CPO prices to be "buoyant" within the next eight weeks against a backdrop of lower output of the commodity amid a production downcycle.

"Key fundamental driver for prices next week (this week) will be the release of MPOB statistics on Jan 11 (yesterday). Exports will surely see a decline as indicated by data from cargo surveyors," the research house wrote in a note ahead of the release of MPOB's latest CPO data yesterday.

Costlier crude oil usually pushes agricultural commodities such as oil palm and soybean onto investors' radar.  This is because prices of these crops tend to rise in tandem with crude oil rates due to demand for food-based commodities as feedstock for production of biofuel, deemed a cheaper alternative to hydrocarbon resources.

Expectations of rising inflation also result in demand for commodities as a hedge against rising prices as commodity rates tend to rise in tandem with consumer prices.

As demand for goods increases, prices of the items climb as well, pushing up prices of commodities used to manufacture these goods. Investors usually snap up the US dollar as a safe haven asset in times of market uncertainty, adding to the value of the greenback.

However, an improving broader landscape will prompt investors to acquire riskier assets such as stocks and real estate, particularly now in emerging markets in Asia.

As crude oil is transacted in US dollars, a weaker US currency, essentially, makes the commodity more attractive to global traders, hence higher demand and prices for crude. The US Dollar Index, which measures the value of the greenback against a basket of six major world currencies, fell for the third consecutive day to 77.019 at 3.25pm, sending the ringgit to 3.3387, its firmest point against the greenback since September 2008.