Tracked by the Federal Reserve, the weekly U.S. Dollar Index (UUP) measures the value of the dollar compared to its six significant trading partners. A rising value means that the dollar is stronger compared to other currencies and vice versa. In the first seven days of July, the US dollar has gained 1.4%.
Flight-to-quality amid Greek debt renegotiations and the Chinese equity market slump has led investors to safe-haven assets, including the US dollar (UUP) and the Japanese yen.
Future outlook is positive
The Fed will likely take a more gradual approach at increasing interest rates, but its stated policy of rate hikes either this year or next is in contrast to loosening monetary policy elsewhere, especially in Europe and Japan. On the other hand, commodity price weakness is impacting currencies of commodity-producing countries, including Australia and Canada. This is expected to further 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 leading to 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 2.9% towards GDX’s holdings.
China is the largest gold consumer. In the next two parts of this series, we’ll look at the current gold demand in China.