US dollar softens
Tracked by the Federal Reserve, the weekly U.S. 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, and vice versa. The index value decreased from 99.49 on April 13 to 96.44 on April 28, a loss of 3.1%.
During the last five trading days, the US dollar has depreciated by ~1.6%. The U.S. Dollar Index declined for five consecutive days from April 22 to April 28.
The claims for jobless benefits increased, as we saw in the previous article. This also led the US dollar to fall.
Growth in the US manufacturing sector also dropped in April over and above market expectations. According to the latest release of the Texas Manufacturing Outlook Survey, declining export demand and the weakening of the US oil and gas sector impacted the manufacturing sector in April.
Weak economic and labor market data could also lead to a delay in a Fed rate hike, which is again negative for the US 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 weaker 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), Alamos Gold (AGI), and B2Gold Corp. (BTG). It also affects ETFs such as the VanEck Vectors Gold Miners Index ETF (GDX). GG, ABX, and NGD form 16.15% of GDX’s holdings.
The PowerShares DB U.S. Dollar Index Bullish ETF (UUP), on the other hand, is a good way for investors to gain exposure to the rising dollar.