Could the US Dollar’s Retreat Provide Some Relief to Gold?



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 so far this year

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, Trump trade has been reversing, leading to the US dollar giving away most of those gains. One reason for this reverse is doubt over whether Trump will come through on his campaign promises, a particular concern after his proposed healthcare bill failed. Trump has also been talking down the dollar, telling The Wall Street Journal that “our dollar is too strong.”

More recently, the dollar took a hit from strong Eurozone economic data. The Washington Post‘s report of Donald Trump sharing sensitive and classified information with Russia also undermined the dollar. While the president may have the right to share the information, the report implies that the content was sensitive enough to be withheld from US allies. This report might lead to a loss of faith in the US administration, thereby weakening the dollar further. The Fed’s move to strengthen interest rates seems to be the only variable countering dollar-weakening factors.

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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