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Could the US Dollar Work in Gold’s Favor in 2019?

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Jan. 1 2019, Updated 7:33 a.m. ET

The US dollar and the Fed’s approach

Like the Fed’s policies, the strong US dollar (UUP) impacted gold prices (GLD) this year. Key factors supporting the dollar this year were the Fed’s interest rate hikes and outlook, trade war concerns, and US markets’ (SPY) (QQQ) outperformance of other markets. As we discussed previously, the Fed’s rate hike cycle could end in 2019 or 2020, and hikes could be few and far between due to falling growth concerns, weighing on the US dollar.

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Higher interest rates in the United States, especially during low or near-zero interest rates elsewhere, make the dollar (USDU) more attractive. That advantage, however, seems to be as good as it gets. Market participants anticipate one rate hike instead of three in 2019, and as the Fed winds up its tightening and other major central banks start to tighten, the dollar’s advantage might diminish.

Outperformance to wane?

Another factor boosting the dollar was US markets’ outperformance of international markets. However, US markets have joined the global slowdown in the last few months and emerging markets could make a strong comeback after prolonged weakness, further diminishing the dollar’s advantage.

Gold and the US dollar

If investors pull away from the dollar, they could trigger a rally in gold (JNUG). And although US-China (VTI) (FXI) trade tensions escalating after the truce ends could support the US dollar, gold could rise along with the dollar on rising geopolitical concerns.

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