Starting 2018 on the wrong foot

After declining by ~10% in 2017, the US dollar (UUP) has extended its fall in 2018. It has fallen by ~2% against a basket of currencies so far, trading close to three-year lows. There are many potential reasons for the slump in the dollar. Some of them are related to the strong performance of overseas currencies, while others are due to uncertainty regarding US policies.

Us Dollar Feels Sustained Pressure: Good News for Gold

Talking the US dollar down

At the World Economic Forum in Davos, US Treasury secretary Steven Mnuchin stated that the United States welcomes a weaker dollar, as it could benefit the country. His comments were a departure from the strong-dollar policies followed by previous Treasury secretaries. Mnuchin’s comments accelerated the decline in the already sinking US dollar, and it hit a three-year low.

Underperformance

The US dollar is also under pressure because other currencies, especially the euro and Japanese yen, are strengthening. The euro is appreciating due to stronger-than-expected macro data and expectations of monetary policy tightening by the European Central Bank (or ECB). The yen’s strengthening is being driven by expectations of quantitative easing unwinding this year. Investors should recall that the Bank of Japan unexpectedly cut long-term purchases at its January 2018 meeting. As the interest rate differential between the United States and the rest of the world declines, demand for the US dollar falls.

Further weakness in the US dollar could be positive for gold prices and gold stocks such as Goldcorp (GG), Randgold Resources (GOLD), Hecla Mining (HL), and Franco-Nevada (FNV), which are trading at $14.90, $102.90, $4.40, and $78.30, respectively.

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