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Factors that Could Pressure the US Dollar and Benefit Gold

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Apr. 3 2018, Published 10:27 a.m. ET

US dollar weakens

Gold’s recent gains came on the back of uncertainty, which was pinned by weakness in the US dollar (UUP). The dollar is down ~2.5% year-to-date, as the majority of the recent events were negative for the dollar. The Fed’s less-hawkish-than-expected guidance in the near term, trade war talks, recent inflation, and other economic data were mostly negative for the dollar.

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Uncertainty in policies and the dollar

While the immediate concerns over a trade war have receded, the uncertainty is far from over. Usually, in times of uncertainty, the dollar acts as a safe-haven asset and draws inflows. However, because the US is the primary party that would be impacted by these trade talks, the dollar is on a weaker path.

The dollar is pitted against other major currencies, which may be getting stronger. For example, the Japanese yen has drawn the recent safe-haven bids among currencies.

The uncertainty related to the Trump administration’s policies related to trade and infrastructure spending should contribute to the dollar’s volatility. As the trade talks proceed, trade tensions could still arise.

The dollar and gold

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. As a result, gold stocks Goldcorp (GG), Randgold Resources (GOLD), Hecla Mining (HL), and Franco-Nevada (FNV) could benefit. These stocks are trading at $13.30, $101.70, $3.55, and $68.16, respectively.

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