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Could the US Dollar’s Rally Fizzle to Gold’s Benefit?

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Dollar gains, while gold loses

One of the major factors impacting gold prices negatively in 2018 is the strength of the US dollar. Because gold is denominated in the dollar, strength in the dollar causes gold to become more expensive in other currencies, thereby subduing its demand. 

Year-to-date, the UUP ETF (UUP) has risen 5.2%, while the SPDR Gold Shares ETF (GLD) has declined 8.4%. In 2018, trade war concerns and the emerging market (EEM) currency crisis has boosted the dollar’s safe-haven bids. The relative outperformance of US equity markets (SPY)(VOO) has also driven the dollar’s gains.

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The beginning of the end for the dollar’s rally?

According to a Reuters poll, while the US dollar could hold onto its gains for the rest of this year, it’s unlikely to maintain its ascent after that. The latest poll of over 50 strategists taken between August 31 and September 5 shows that the dollar could reverse its trend with most currencies.

These strategists’ basic premise is that US economic growth momentum has peaked. Other factors supporting the dollar such as rate hikes and trade tensions have now been priced into the dollar. Morgan Stanley analysts also believe that the US dollar is “topping out,” according to Bloomberg.

Long positions declining

Speculators have also reduced their long positions on the US dollar for the first time in the last 11 weeks. The net long dollar positions had grown to a one-and-a-half-year high before last week.

It’s no secret that President Trump wants a weaker dollar to support the country’s exports. He has also criticized the Fed for raising interest rates. While his comments are not expected to influence the Fed’s policy, the dollar usually weakens after such comments, as they underscore the administration’s disposition toward a weaker currency.

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

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