Source: Jeff Yoders/MetalMier
Last week, the dollar index bounced off a key support level, suggesting that the dollar bull market that started in 2014 has yet to end.
The bullish move happened after we pointed out the US dollar was approaching a key support level last week. The dollar’s move is bearish for metal markets since commodities are priced in US dollars and thus are negatively correlated to dollar fluctuations.
The dollar advanced against most developed-market currencies after China cut interest rates for the sixth time in less than a year, and gave banks more freedom to lend more money for the fourth time since November. Also, a day earlier, the European Central Bank announced that it is ready to use all its tools to raise inflation and growth.
About That Rate Hike…
Even though the economic data this year made the Federal Reserve delay a rate hike, investors still expect the Fed to raise interest rates sometime early next year. However, other central banks are not showing even remote interest in a rate hike anytime soon as their focus is to employ other easing measures to stimulate incremental growth.
These actions have made investors focus on diverging monetary policy between the US and most countries overseas. Although the US economy is not growing at a fast pace, it’s still looking better than most major economies. Once the Fed raises rates, higher borrowing costs domestically would make the dollar more attractive to investors seeking yields than other currencies. That would potentially make the dollar appreciate against other currencies, having a depressing effect on commodity/metal prices.