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Can the US Dollar Support Gold Prices Going Forward?

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US dollar

Tracked by the Fed, the weekly US Dollar Index (UUP) compares the value of the US dollar with six significant currencies—the euro, the Japanese yen, the British pound, the Canadian dollar, the Swiss franc, and the Swedish krona. A higher value means that the US dollar is stronger than the other currencies, and vice versa.

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Performance year-to-date

The US dollar rose 4.5% in 2016 after Donald Trump won the presidential election. That’s a huge movement for currency. In 2017, however, the Trump trade has been reversing, leading the US dollar to give away most of those gains. One reason is the Fed’s dovishness on further interest rate hikes. Another reason could be doubts over whether Trump will come through on his campaign promises. That’s a particular concern after the proposed health care bill failed to receive enough votes to bring it to a vote in the House.

Many investment banks, including HSBC and Citigroup (C), expect the US dollar to strengthen in the short term as the Fed moves ahead to normalize interest rates. HSBC also believes that Republicans could unite when it comes to tax reforms. If Trump is able to instill confidence in the markets that he can convert his agenda into law, the markets would give a loud cheer.

US dollar and gold

Dollar-denominated assets such as gold are influenced by the US dollar’s strength. A strong dollar is negative for gold, and vice versa. Growing strength in the dollar puts pressure on gold prices.

As a result, it’s important to track the dollar’s direction. Doing so can indicate the direction of gold prices (GLD) and the prices of gold-tracking stocks such as Iamgold (IAG), AngloGold Ashanti (AU), Gold Fields (GFI), and Agnico Eagle Mines (AEM).

The US dollar also influences funds such as the VanEck Vectors Gold Miners ETF (GDX). Together, the three companies mentioned above make up 11.9% of GDX’s holdings.

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