US dollar remains strong
Tracked by the Federal Reserve, the weekly US Dollar Index measures the value of the dollar compared to its significant trading partners. A rising value means the dollar is stronger compared to other currencies. The index value increased from 96.54 on April 3 to 99.40 on April 13, a gain of 3.0%.
During last five trading days, the dollar has depreciated by ~1%, mainly because of weak industrial data released by the Federal Reserve on April 15. This seems to be a short-term trend, as the dollar is generally on an uptrend.
The dollar is gaining strength against major currencies mainly because of the global interest rate differential. The expectation of a Fed interest rate hike is also supporting the dollar.
The US dollar and gold
Gold mainly trades in US dollars. As a result, a weaker dollar makes gold cheaper for other nations to purchase, and it increases the demand for gold. Also, when the dollar starts to lose value, investors look for an investment to maintain value. Gold is a good alternative.
Gold usually goes up and down depending on the strength of the dollar and the US economy. There are other factors that impact the dollar. We’ll look at those later in this series.
Fallout on gold prices
A stronger US dollar has a fallout impact on gold prices. That, in turn, affects gold stocks such as Goldcorp (GG), Barrick Gold (ABX), New Gold (NGD), and Kinross Gold (KGC), as well as ETFs such as the VanEck Vectors Gold Miners Index ETF (GDX). Three senior producers—GG, ABX, and NEM—make up 20.0% of GDX’s net assets.
The PowerShares DB US Dollar Index Bullish ETF (UUP) is a good way for investors to gain exposure to the rising dollar.