US Dollar Index
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 than other currencies, and vice versa.
US dollar weakens
For the week ending June 19, the US Dollar Index fell close to 1%. This is also reflected in the 0.8% fall in the PowerShares DB USD Index Bullish Fund (UUP).
The US dollar fell on a dovish tone by the Fed. It was also impacted by the downgrading of growth forecast for the US economy to 1.8%–2.0% from its March’s projection of 2.3%–2.7%. The Fed also raised the US unemployment rate projection to 5.2%–5.3% from March’s estimate of 5.0%–5.2%.
The US dollar also fell on a weaker-than-expected US Consumer Price Index (or CPI) inflation numbers for May. CPI inflation came in at 0.4% month-over-month, but consensus expectation was for a 0.5% rise.
The FOMC made clear in its meeting that US consumer prices need to go up for it to consider an interest rate hike.
US dollar’s loss is gold’s gain
Dollar-denominated assets, including gold, are influenced by the strength of the dollar. A strong US dollar is negative for gold, and vice versa. When the Fed didn’t provide a clear timeline for a rate hike, the US dollar and gold prices inched up.
So it’s important to track the direction of the dollar. This can point you to the direction of gold prices (GLD) and gold stock prices like AuRico Gold (AUQ), Alamos Gold (AGI), and Iamgold (IAG). The US dollar also influences funds like the VanEck Vectors Gold Miners ETF (GDX). Together, these three companies contribute 2.9% toward GDX’s holdings.