Commodities erased this year's gains after the U.S. Federal Reserve said the world's biggest economy faces "significant downside risks," boosting speculation raw-material demand will falter.

The Standard & Poor's GSCI Index of 24 commodities dropped 4.1 percent as of 2:44 p.m. in London, bringing the decline this year to 3.1 percent. Copper fell to a one-year low in New York and London and oil dropped to the lowest in four weeks.

The Federal Reserve said yesterday it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth, saying it sees "significant downside risks" to growth. The Dollar Index gained to a seven-week high, making commodities trading in the U.S. currency more costly for buyers using other monies.

"We're seeing the dollar strengthen and that's weighing down on the whole commodity complex," Dan Smith, an analyst at Standard Chartered Plc in London, said today by phone.

The world economy will expand 4 percent this year and in 2012, the International Monetary Fund said on Sept. 20, cutting forecasts made in June for a 4.3 percent expansion this year and 4.5 percent in 2012.

David Fuller's view Slower global GDP growth and a stronger US dollar against Asian, South American and also European currencies are certainly factors behind the weaker trend for resources. However, the most important reason for this sell-off evident on the Continuous Commodity Index (Old CRB) (monthly, weekly & daily) is global deleveraging.

Over a decade of strongly rising commodity prices, in what Fullermoney has maintained is a secular bull market punctuated only by downturns in the business cycle, created a fashion for investing in commodities. Gold garnered most of the headlines and the biggest following but you will have also seen the proliferation of commodity tracker funds. Additionally, many investment managers either added or increased a resources allocation for their funds, in pursuit of diversification and growth.

Global GDP growth and commodity prices have an important symbiotic relationship. Persistent, let alone increasing global growth lifts demand for all commodities, commencing with the industrial sector. However, rising commodity prices create inflationary pressures which central banks seek to rein in with higher interest rates, leading to slower GDP growth or recession. Conversely, within their secular uptrend, cyclically lower prices for commodities often becomes a prerequisite for a reversal from tightening to accommodative monetary policies from central banks.

An upward spike by crude oil (Brent & WTI) - the most important commodity by far - causes recessions. We most recently saw this in 2008 and again earlier this year. Banking and sovereign debt problems were even more recessionary for most western economies. However, the spikes in crude oil and staple food prices were arguably a bigger problem for Asian-led growth economies than the west's financial crises.

Fullermoney has maintained that lower prices for commodities - particularly crude oil and staple foods - were necessary before growth economies would consider reversing their monetary tightening biases. Their growth engines need to purr at a faster rate to help cushion and eventually reverse the west's economic slowdown.

This week's sharp decline in the Old CRB Index shown above is an important step in the right direction.

(See Eoin's excellent review of markets below.)