uploads/2015/08/US-dollar1.png

Why Positive Outlook on the US Dollar Is Negative for Gold

By

Updated

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 expectations of a Fed rate hike this year are keeping the US dollar buoyant. In the latest move, China devalued the yuan on August 11 and then again on August 12. This pushed the US dollar even higher. China described the devaluation as a “one-off depreciation.” This pushed the yuan to the lowest level against the US dollar in almost three years.

Article continues below advertisement

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 commodity-producing countries’ currencies, including Australia and Canada. China’s recent moves will put more pressure on commodity producer countries’ currencies. 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 AngloGold Ashanti (AU), Gold Fields (GFI), and Agnico Eagle Mines (AEM). The US dollar also influences funds like the VanEck Vectors Gold Miners ETF (GDX). Together, these three companies contribute 11.90% towards GDX’s holdings.

Advertisement

More From Market Realist