The US dollar (UUP) has been on an upward trajectory in 2018 so far. Year-to-date, it’s up ~7.4% compared to other major global currencies. The key factors supporting the greenback in 2018 have been the Fed’s interest rate hikes and outlook, trade war concerns, and the outperformance of US markets (SPY)(QQQ). This rise in the dollar has put sustained pressure on gold (SGOL) and other precious metals year-to-date. In this article, we’ll discuss the outlook, which will likely be a major deciding factor in precious metals’ performance.
The Fed’s dovish tone
The Federal Reserve has already raised rates three times this year, and it’s expected to raise them for a fourth time in December. Higher interest rates in the United States, especially during low or near-zero interest rates elsewhere, make the US dollar (USDU) more attractive. That advantage, however, seems to be as good as it gets. Lately, the Fed’s tone has been dovish. More recent data on US employment may also encourage the Fed to keep its tone dovish at its December meeting. Market participants also anticipate just one more rate hike in 2019, compared to three previously.
For the week ended December 7, the US dollar index posted its largest weekly losses in the last three months, amounting to 0.80%. The decline in US Treasury yields (BND) has also been weighing on the US dollar.
Gold and the US dollar
If investors push away from the dollar, they could trigger a rally in gold (GLD)(JNUG). But a further escalation in the trade relations between the United States and China after the truce ends could support the US dollar. Even in such a scenario, gold could rise along with the dollar on rising geopolitical concerns. In October, gold prices rose 2.1% due to increased equity market volatility despite a 2.2% rise in the US dollar index. Geopolitical tensions and uncertainty have historically risen simultaneously.