Is the US Dollar Topping Out to the Benefit of Gold?

The major reason for gold’s weakness year-to-date despite policy uncertainty and rising trade war concerns in the strength in the US dollar. The Federal Reserve’s tighter policy stance has also stalled gold’s rally. Since the end of March, the Power Shares DB US Dollar Bullish ETF (UUP) has gained ~8.0% against a basket of currencies.

These interest rate differentials have driven investors to the dollar. The Federal Reserve, the world’s major central bank, is raising rates in contrast to the rest of the world’s central banks, which are still following a loose monetary policy.

The speculative investor positioning in the dollar (USDU) is also getting very long. Long dollar bets are the largest in more than a year and a half. For the week ended August 3, speculators were net long on the US dollar for the seventh straight week.

Morgan Stanley analysts also believe that the US dollar is “topping out,” as reported by Bloomberg. The analysts cited a number of factors that could lead to a sell-off in the dollar, which include:

• comments from President Donald Trump on currencies, including the strong US dollar
• weaker US economic (VTI)(SPY) survey indicators
• Chinese economic measures
• potential tweaks to the Bank of Japan’s policy

According to the analysts from Morgan Stanley, “The USD has peaked and is due to reenter its secular downtrend soon.” The analyst note added, “Markets are linking rising risk aversion with USD strength; we think the consensus is wrong.”

Although the US dollar has been gaining as a safe-haven asset as trade concerns heighten, a further escalation could leave it vulnerable. This would be beneficial for gold (GLD) and gold equities (GDX)(GDXJ), which are essentially a levered play on the precious metal.