How Did the Rebound in the US Dollar Impact Gold?

The US dollar rebounded on Tuesday, August 2, after losing on Friday due to weak economic data coming out of the US. The US dollar rose by 0.15% against the basket of six major world currencies.

The US dollar is depicted by the DXY Currency Index and measures the dollar’s strength against a trade-weighted basket of six major currencies, including the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. The US dollar has retreated by almost 1.9% over the past five trading days.

A fall in the US dollar often gives strength to precious metals, which are dollar-based assets. The short-term comparative performances of gold and silver are shown in the graph below. Gold rose on August 2 as the dollar hovered near a three-week low after expectations of a near-term US interest rate hike lost steam.

As you can see in the above chart, gold rose in July. On other days, precious metals flowed in the opposite direction. Notably, the correlation between gold and the DXY Index has been -0.34 over the past year. A correlation of 0.34 indicates that about 34% of the time, the US dollar moves in the opposite direction as gold.

The dollar and gold—and, for that matter all, precious metals—have a close-knit relationship. The strength of the US dollar weighs down dollar-denominated assets such as gold and silver because investors in other currencies have to buy an expensive dollar against their home currency to invest in precious metals. The DXY index traded at ~95 on Friday.

Remember, the performance of precious metals is also closely reflected in funds like the iShares MSCI Global Gold Min (RING) and the PowerShahers DB Gold Fund (DGL). These two funds have increased by 9.9% and 2.1%, respectively, on a five-day trailing basis.