US dollar on an uptrend
The US dollar (UUP) has been on a fairly upward trajectory in 2018 thus far. The Fed’s interest rate hikes and outlook, trade war concerns, and relatively better US market (SPY) (QQQ) performance as compared to the rest of the world are the major factors driving the dollar up. This rise in the dollar has put sustained pressure on gold (GLD) and other precious metals year-to-date. It is, however, the outlook that we are interested in, as it will likely be a major deciding factor in the future performance of precious metals.
Factors supporting dollar to fade away?
Some of the factors that have been supporting the higher dollar (USDU) in 2018 could be about to fade away if not go away altogether. The effects of the tax reforms, which have been helping the US economy (VTI), will likely start wearing off in 2019. Moreover, lower taxes and higher spending is already leading to higher budget deficits, which is negative for the long-term outlook of the dollar. Meanwhile, a tighter-than-expected policy stance from the Fed could still keep on supporting the dollar.
Moreover, while the US dollar has been the world’s reserve currency for a long time, other countries’ discontent with US dominance, its trade policies, and sanctions is growing. Russia (RSX) has been selling US Treasuries (TLT) and stocking up on gold for a while to reduce its dollar dependence. According to a report by Bloomberg and Kaplan, JP Morgan’s (JPM) Marko Kolanovic also states that Donald Trump’s foreign policy is a “catalyst for long-term de-dollarization.” Kolanovic added, “US unilateral policies risk bringing major powers of China, Europe, and Russia closer, and such an alliance could profoundly impact the dollar-centric financial system.”
The report also says that gold could offer a hedge as countries de-dollarize. Thus, countries’ and investors’ push away from the dollar could trigger a rally in gold (JNUG).
In the next part of this series, we’ll talk more about what market experts think about the dollar and how the US budget balance impacts it.