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 made a swift recovery in the week ended September 25, 2015, on the back of hawkish statements from several members of the Federal Reserve. The US dollar index gained 2% until September 25 after falling to a level of 94.5 after the Fed’s decision not to hike interest rates on September 17. The dollar also remained strong on speculations of an extension of quantitative easing by the ECB (European Central Bank).
Comparatively, the US economy is doing better than most of the other developed world economies. This differential is also leading to relative gains for the dollar.
Going forward, the US dollar should remain supported by the difference in the outlook for monetary policies of the US and those of Europe (EZU) and Japan (EWJ). Weaker commodity prices are also likely to keep the pressure on commodity currencies such as the Canadian dollar, Australian dollar, and New Zealand dollar. This should also lead to a stronger US dollar.
The next major catalyst to look forward to for the US dollar’s outlook would be the US jobs report, which will be released on October 2.
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 toward 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% toward GDX’s holdings.