Why the US Dollar Fell from Its 14-Year High



DXY and gold moved in opposite directions

US employers boosted hiring in November, and the unemployment rate fell to a nine-year low of 4.6%. Thus, the likelihood of a rate rise seems particularly high. The US dollar has a 30-day-trailing gain of almost 3.2% as the interest rate increase becomes increasingly certain. The increase in the interest rate on Treasuries helps the US dollar, as more and more money will flow into the country that offers a higher rate of interest.

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The US dollar index (or DXY), which measures the greenback against a basket of six major world currencies, fell 0.65% on Monday, December 5, 2016. The yield on ten-year US Treasuries fell from a 16-month high of 2.4% at the end of November. The dollar has fallen from almost a 14-year high of 102.05 on November 24 on the back of a surge in US Treasury yields.

Fluctuations in the dollar are a major determinant of precious metal prices. Movements in gold and the US dollar are shown in the above graph. As you can see, they mostly have an inverse relationship. The higher the dollar, the lower the demand for dollar-denominated assets.

Correlation between the US dollar and gold

The correlation between gold and the DXY is -0.36, which means that about 36.0% of the time, gold and the dollar move in opposite directions. Silver’s correlation with the DXY is -0.32.

These changes due to the dollar can also be seen in mining funds such as the VanEck Vectors Junior Gold Miners Fund (GDXJ) and the Global X Silver Miners ETF (SIL). These two funds have seen massive year-to-date rises alongside precious metals, but they fell during the past month.

Mining stocks that have fallen in the past month include Royal Gold (RGLD), Goldcorp (GG), First Majestic Silver (AG), and AuRico Gold (AUQ).


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