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Gold Loses Its Sheen as the US Dollar Strengthens

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US dollar

Tracked by the Federal Reserve, the weekly US Dollar Index (UUP) measures the value of the dollar compared to its six significant trading partners—the euro, Japanese yen, British pound, Canadian dollar, Swiss Franc, and Swedish Krona. A rising value means that the dollar is stronger compared to other currencies and vice versa. The US dollar has risen 1.30% from July 10 to July 22.

In a testimony prepared for the U.S. House of Representatives FSC (Financial Services Committee), Fed Chair Janet Yellen said, “If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate.” This supported the rally in the US dollar.

The recent economic data out of the US—including CPI (consumer price index) inflation, jobless claims, and housing data—are also positive. The data also support the US dollar. We’ll discuss these indicators in the next parts in this series.

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Positive outlook

The Fed will likely take a more gradual approach at rising interest rates. However, its stated policy of rate hikes either this year or next year is in contrast to loosening monetary policy elsewhere, especially in Europe and Japan. In contrast, commodity price weakness is impacting currencies of commodity-producing countries, including Australia and Canada. This is expected to add to the strength of the US dollar.

US dollar and gold

Dollar-denominated assets, including gold, are influenced by the dollar’s strength. A strong US dollar is negative for gold and vice versa. The current strength in the US dollar is also putting pressure on gold prices.

As a result, it’s important to track the direction of the dollar. This can point you towards 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 2.90% towards GDX’s holdings.

In the next part of this series, we’ll delve into the current state of the US labor market.

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