International Forecaster Weekly

AS THE DOLLAR FALLS - Gold Continues to Rise

After hitting a 20-year high in late September, the dollar has been shrinking and fast.

The U.S. dollar index tracks the greenbill against a basket of six other major currencies – the pound, euro, yen, Canadian dollar, Swiss franc and Swedish krona. 

It's down almost 10% (at 104.58 today) from its early fall peak of 114.53. That's the most the dollar has fallen in a 10-week time frame in over a decade.

Not coincidentally, gold hit its 2022 low of $1,639 on the same day the dollar hit its high. And since November 3rd – when gold matched its September low – the dollar has been steadily falling.

At the same time, gold has responded by hitting its highest point – just shy of $1,815 at New York lunch time today – since early July.

Guest Writer | December 10, 2022

By Dave Allen for Discount Gold & Silver

After hitting a 20-year high in late September, the dollar has been shrinking and fast.

The U.S. dollar index tracks the greenbill against a basket of six other major currencies – the pound, euro, yen, Canadian dollar, Swiss franc and Swedish krona. 

It's down almost 10% (at 104.58 today) from its early fall peak of 114.53. That's the most the dollar has fallen in a 10-week time frame in over a decade.

Not coincidentally, gold hit its 2022 low of $1,639 on the same day the dollar hit its high. And since November 3rd – when gold matched its September low – the dollar has been steadily falling.

At the same time, gold has responded by hitting its highest point – just shy of $1,815 at New York lunch time today – since early July.

Dollar Index Created in the 70s

The USDX was established by the Federal Reserve in 1973 after Nixon first ended the gold standard and the Bretton Woods Agreement was dissolved. 

It’s now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange.

Axios’ Matt Phillips says the dollar’s precipitous drop “suggests markets now think the worst of inflation is over.”

So, the Fed “can soon start to slow down or even stop its rate-hiking program.”

Like virtually everything else in the markets this year, the dollar's rally — it was up nearly 19% at one point — is tied to the aggressive interest rate hikes the Fed has imposed to try to bring inflation down.

Fiat currencies ride the rollercoaster for a bunch of reasons. But some of the most important drivers are known on Wall Street as "interest rate differentials."

Phillips notes that when a central bank in one country is raising its interest rates, and a central bank in another country isn’t, “the former's higher rates act as a magnet pulling capital into that country's currency.”

Dollar Follows Expectations

That's essentially the path the dollar has taken in 2022.

Since hitting its early fall peak, the dollar started to fall on news suggesting the Fed might not keep raising rates as much as it had been.

One example is when it fell after the government’s October jobs report showed a rise in unemployment and weakening wage growth.

And it dove again on November 10th, when inflation data was weaker than previously expected…

…and again on the first of this month, when Fed chair Jerome Powell appeared to be suggesting that the Fed would shrink the size of its mid-December rate hike a quarter of a percentage point to 50 basis points.

The proof in the pudding will come at the Fed’s policy meeting next Wednesday – when Powell & Co. make the downward pivot that most Fed watchers expect.