DXY, the US Dollar Index, was a powerhouse of strength this past week. In doing so, it rose for the fifth straight day and it finally pierced the psychological level of 100.00. The dollar’s appreciation has initiated secondary effects on a number of critical commodities. Specifically, it has resulted in a dramatic decline in the value of gold and silver. The market continues to wrestle with changing inflection points for Federal Reserve rate cuts. To that end, traders are re-positioning and thus creating additional volatility.
Gold prices plummeted, once again approaching the $3930 level per troy ounce. Analysts say that is largely because of the strengthening US dollar, which has made gold less appealing to investors looking for a safe haven. Rising expectations for a Federal Reserve rate cut in December have compounded the bearish mood both and gold. As investors begin to readjust their expectations, the precious metal’s luster wanes and an almost tangible change in trading sentiment takes hold.
In the foreign exchange market, EUR/USD made additional losses. It has today broken decisively below that 1.1500 support level for the first time since early August. The drop underscores deep fears over the strength of the Eurozone’s recovery. At the same time, a strengthening dollar is lifting its fortunes abroad. The euro continues to weaken against the dollar. This trend is consistent with what we’re observing in other currency pairs as traders respond to shifting economic fundamentals.
Silver mirrored gold’s decline as prices dropped for the third day in a row. We saw them fall under the $47.00 an ounce. Yet the silver market is under the same pressure. Investor demand is flooding into the higher-yielding dollar, which makes gold and silver much more attractive. Finally, a strong dollar has put some downward pressure on gold and, by extension, silver. At the same time, reduced expectations for Fed rate cuts have added to this impact.
At the same time, West Texas Intermediate (WTI) crude oil prices have been remarkably stable, staying around the $60.00 per barrel. Even with some of the minds predicting oversupply in the oil market, stability couldn’t be higher. Everything these concerns have done has overwhelmed crude prices to post steep losses. Despite these worries, WTI has continued to hold up near a 3-month range. A major factor in this stability has been the firm performance of the US dollar itself.
Market participants reacted negatively to the dollar’s pervasive strength. In response, the AUD/USD currency pair fell to multi-day lows. The Australian dollar is under double pressure from their domestic economic woes. Partly, it is being challenged by global trade dynamics and commodity price changes.
Today, market participants are hyper-focused on emerging economic indicators and the latest monetary policy moves from global central banks. They make currency and commodity market moves the focus of their pending supervision. I think the importance of how this dollar strength plays off of commodity prices will probably define the trading angle going into next week.