Tag: Dollar index

Trump’s Desire for a Weaker US Dollar Brings Upside Potential to Metal Prices

Trump’s Desire for a Weaker US Dollar Brings Upside Potential to Metal Prices

“Threats of a trade war intensified over the weekend, as President-elect Donald Trump said the U.S. dollar ‘is too strong,’ wrote Investors Business Daily recently.
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Trump, who will be president in one more day, also “warned BMW that it will face a 35% tariff on imports to the U.S. from a plant it’s building in Mexico,” according to IBD. In addition, Trump specifically called out China and its weakening currency, stating that U.S. companies can’t compete with China because the dollar is too strong.

Dollar Index Falls to a 1-Month Low

[caption id="attachment_82879" align="aligncenter" width="500"] The U.S. Dollar Index Falls to 1-Month low on Trump’s talk. Source: MetalMiner analysis of @stockcharts.com data.[/caption]
All of this helped lower the U.S. dollar index by 1% against the world’s other major currencies, falling to its lowest level in a month. Previous administrations have maintained a steady policy of backing a strong dollar and, according to The Industry Spread, “presidents have tended to refrain from commenting on the currency altogether.”

Gold Surges as The Federal Reserve is Unlikely to Increase Interest Rates

[caption id="attachment_80029" align="aligncenter" width="500"]Gold prices near multiyear highs Gold prices are near multiyear highs. Source: MetalMiner analysis of @StockCharts.com data.[/caption]

Gold prices surged last week, settling near multiyear highs. Two developments added fuel to gold’s bull market:

Weak GDP Data

For the second quarter, the U.S. gross domestic product grew at a seasonally adjusted annual rate of 1.2%, less than half the rate economists had predicted for the second quarter, casting doubt on the strength of the U.S. economic recovery. Gold benefited from safe-haven demand on a worsening economic outlook.

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Meanwhile, Federal Reserve officials said earlier last week that they could raise rates as early as September, but most analysts agree that their language isn’t hawkish enough to suggest an increase is forthcoming.

In addition, the weak data raises even more doubts on whether the Fed will raise interest rates this year. Gold is a more attractive asset when interest rates are low. On the other hand, a rate hike would lower the value of gold, since investors would prefer to park their money in yield-bearing bonds than gold.

Japan Didn’t Ease Monetary Policy

[caption id="attachment_80031" align="aligncenter" width="500"]Dollar Index falls on weak GDP and stronger Yen The U.S. dollar index falls on weak GDP and a stronger Yen. Source: MetalMiner analysis of @StockCharts.com data.[/caption]

The U.S. dollar fell sharply against the yen last week after the Central Bank of Japan announced limited easing measures. Markets were surprised the Bank didn’t do more to ease monetary policy.

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Expectations that the Fed would raise rates this year combined with easier monetary policy elsewhere would make the dollar more attractive to yield-seeking investors, but things are going the other way. The Fed is not raising rates and countries like Japan are not easing monetary policy as much as investors had expected. Consequently, the U.S. dollar has fallen, giving a boost to dollar-denominated assets such as gold.

What This Means For Gold Buyers

A more dismal economic outlook, a falling dollar and ongoing low interest rates in the U.S. continue to favor rising gold prices. Until we see any of these drivers turning around, we would expect gold’s (and silver’s) bull market to continue.

US Dollar Index Hits 7-Month High, Hindering Any Bounce for Metals

US Dollar Index Hits 7-Month High, Hindering Any Bounce for Metals

Last Wednesday, the Federal Reserve said that a December interest rate increase is still on the table. On top of that on Friday, data showed an addition of 271,000 jobs were created in October, with the unemployment rate dropping to 5%, beating expectations.

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The good news greatly increased chances for a December rate hike. As a result, bond yields surged and the dollar appreciated against all currencies. The dollar index made a bullish move and is now at a seven-month high, breaking above resistance levels. The move suggests a continuation of the dollar’s bull market.

[caption id="attachment_74910" align="aligncenter" width="500"]Dollar Index hitting 7-month high The US dollar Index hits a seven-month high. Source: MetalMiner analysis of @StockCharts.com data.[/caption]

Dollar Up, Metals Down

A rising dollar is something we’ve covered in previous articles. One of the side effects of a strong dollar is lower commodity prices since commodities are priced in US dollars and thus are negatively correlated to dollar fluctuations.

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Industrial metals are commodities and a strong dollar has a depressing effect on prices. In the next chart we can see the dollar index versus the Industrial Metals exchange-traded fund. Notice how the dollar started to rise in mid-October, making industrial metals fall to multiyear lows.

Dollar Index (in green) vs Industrial Metals ETF (in blue)
US dollar index (in green) vs. the Industrial Metals ETF (in blue). Source: MetalMiner analysis of @StockCharts.com data.

What This Means For Metal Buyers

On top of weak Chinese demand, we have a rising dollar. This is bad news for metal producers and good news for metal buyers. For metal prices, we expected, and we still expect, more downward movement ahead.

As the US Dollar Nears Support, Its Movements Will Be Crucial For Metal Prices

As the US Dollar Nears Support, Its Movements Will Be Crucial For Metal Prices

A combination of weakness in the US dollar and a technical oversold condition in commodities has given a boost to prices since August.

[caption id="attachment_74313" align="aligncenter" width="500"]CRB Commodity Index rising since August CRB Commodity Index rising since August. Source: @StockCharts.com.[/caption]

The chart looks nothing but bearish. The recent price stabilization looks like a normal reaction after prices fell sharply in July and August.

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However, commodity prices could go higher if 1 of their 2 major drivers, the dollar, falls from this point:

[caption id="attachment_74315" align="aligncenter" width="500"]Dollar Index testing support US dollar Index testing support. MetalMiner analysis of @StockCharts.com data.[/caption]

The recent weakness in the dollar is normal activity, so long as the index remains range-bound.

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However, the index is approaching a key support level that, if broken, would be a bearish signal for the dollar, which in turn would be bullish for commodities, helping extend their recent rally.

What This Means For Metal Buyers

The main 2 factors driving commodity prices are weak Chinese demand and a strong dollar. If the dollar is not able to hold support, we would take this as the first key signal that suggests a turnaround in commodities markets. The situation in China would still need to improve to boost metal prices, but a lower dollar is definitely a major risk factor that metal buyers need to watch.

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