Strength after dry spell
The US dollar (UUP) is gaining strength after a short dry spell. In August, the dollar came under pressure due to President Trump’s criticism of the Fed’s interest rate hikes as well as political uncertainty in the United States. The most recent speech by Fed chair Jerome Powell was slightly dovish (TLT), which led to a further slump in the dollar and a surge in gold. However, after that, fortunes reversed quickly as trade tensions between the United States and China showed signs of escalation, and the US dollar acted as a safe haven.
Trade escalations and the greenback
In the latest of these potential escalations, the markets are waiting for President Trump’s decision on the imposition of tariffs on $200 billion worth of additional imports from China. Year-to-date, the US dollar has gained whenever trade tensions have escalated and has weakened when trade tensions looked to be easing. On August 27, for example, gold prices (GLD) (IAU) hit a two-week high of $1,213 per ounce as the dollar came under further pressure following the trade deal between the United States and Mexico.
US dollar’s outlook
If trade tensions between the United States (SPY) (IVV) and China (FXI) escalate further, the market is expecting the US dollar to gain. That could, in turn, put pressure on gold prices. However, as we’ll see in the next part of this series, a further escalation in the tariff dispute and tit-for-tat tariffs from China could mean a negative impact on the real activity in the United States, which could eventually affect the dollar. Let’s look at this in more detail in the next part.