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Economic Strength Isn’t Boosting the US Dollar Rise—How It Affects Gold

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Mar. 7 2018, Published 3:13 p.m. ET

US dollar firm

After a long cycle of disappointing the markets, the US dollar (UUP) has finally started firming up. However, there are no unidirectional indicators. In fact, forces are acting on the dollar from both sides.

The recent round of inflation reports could bode well for improving US economic conditions, which is positive for the dollar. As the new chairman of the Federal Reserve, Jerome Powell’s recent testimony also showed the Fed’s positivity about the economy’s outlook. However, growing concerns about protectionism are acting against this optimism.

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Trade war and the dollar

The US dollar declined after President Donald Trump indicated that he wanted tariffs on imported steel and aluminum products. These tariffs could spark a trade war with countries such as China, which could negatively impact domestic growth.

The US economy’s strength could depend on the growth differential between the US and the rest of the world. Higher US growth compared to other economies would increase the attractiveness of the US as an investment destination, providing a further boost to the dollar.

The US Dollar Index averaged 96.6 in 2017. A Reuters poll estimates that the US Dollar Index could end this year at ~88.7. The improving economy outside the US could see the dollar lag compared to its peers. Major central banks could increase their interest rates in 2018.

The dollar and gold

The inflation data for January didn’t have an expected positive impact on the US dollar. Many market participants have realized that the US economy could be in its late cycle and that its growth could be subdued compared to other economies.

Any weakness in the US dollar could be reflected in higher gold prices and gold stocks such as Goldcorp (GG), Randgold Resources (GOLD), Hecla Mining (HL), and Franco-Nevada (FNV) could benefit. These stocks are trading at $12.30, $101.70, $3.60, and $69.80, respectively.

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