Will the Dollar Get Burned by Another Rate Hike?

While the US dollar has seen a decline in 2017, the increased possibility of a Fed rate hike in June could give the currency some breathing room.

Meera Shawn - Author

May 5 2017, Updated 4:05 p.m. ET

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The US dollar’s fall

Although the US dollar has experienced a substantial decline since the beginning of 2017, the increased possibility of a Fed rate hike in June could give the dollar (UUP) some breathing room.

The US Dollar Index (DXY) rose 0.24% on Wednesday, May 3. The US dollar had suffered for the past month, giving a 30-day trailing loss of 1.3% and a YTD (year-to-date) loss of almost 2.9%

Remember, any rise or fall in the US dollar plays substantially on precious metals as the latter are dollar-denominated assets. The higher the US dollar scales, the more expensive it gets for investors from other countries to buy dollar-based assets like gold and silver.

Similarly, as the dollar tumbles, the demand for the dollar and dollar-denominated assets resurfaces.

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The Fed’s decision

That said, any Fed decision not to hike the interest rate in the upcoming months could positively impact the US dollar. But a rise in the dollar and the rate of interest both could have a doubly negative impact on gold.

The latest Fed meeting—which ended on Wednesday, May 3—started as the DXY index was as low as 98.73. But US dollar bulls may see some sunshine if the Fed lifts the interest rate higher in its next meeting in June. A higher rate implies more inflow to US Treasuries, and thus higher demand for the dollar.  

The gold-dollar correlation

The correlation between gold (SGOL) (SIVR) and the US dollar is now -0.12%. Remember, a negative correlation suggests an inverse relationship, meaning that over the past year, about 12% of the time that the dollar rose, gold fell.

Mining companies that fell on Wednesday, May 3, with the decline in precious metals included Hecla Mining (HL), AngloGold Ashanti (AU), Newmont Mining (NEM), and Goldcorp (GG). These shares plummeted 0.38%, 0.44%, 0.97%, and 1.5%, respectively.


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