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Why the US Dollar Is Gaining Strength and the Impact on Gold

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Dollar emerges strong

The primary reason for the fall in precious metals on Monday was a stronger US dollar, which strengthened against the basket of other world currencies. It hit a fresh six-week high against the Japanese yen. The Indian rupee is near a record low against the US dollar. The strength of the euro is also eroding.

Looking at the comparative performance of the US dollar against gold, we use the Invesco DB US Dollar Index Bullish Fund (UUP) to read the movements in the dollar and the SPDR Gold Shares (GLD) to determine gold movements. UUP has gained 4.6% YTD (year-to-date), while GLD has fallen 5%.

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The reason behind the strength of the US dollar on Monday was better-than-expected US manufacturing data. The ISM (Institute for Supply Management) Manufacturing PMI, which measures the level of a diffusion index based on surveyed purchasing managers in the manufacturing industry, was 60.2, which is much higher than the expectation of 58.2.

[marketrealist-chart id=2791407]

Inverse relationship

Since precious metals are all dollar-based assets, investors from other countries don’t invest much in dollar-denominated assets with the dollar getting more and more expensive. That negatively impacts the demand for gold and other precious metals. The inverse relationship between the two is evident from the charts.

During the next few months, the overall market capitalization of GLD is seen declining. It was trading at $118 on Monday, July 2.

Mining companies often react negatively to the strengthening US dollar. Among the miners that fell on Monday were Gold Fields (GFI), Wheaton Precious Metals (WPM), Franco-Nevada (FNV), and Pretium Resources (PVG). They fell 0.84%, 0.59%, 0.48%, and 1.8%, respectively.

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