It’s been said that gold is the anti-dollar, but we can pretty much say the same thing about commodities generally. Dollar strength was partly to blame for gold and silver’s range-bound malaise for much of 2018, and while commodities outperformed in January and early February, we’re starting to see the dollar rear its ugly head again.
To be more specific, the U.S. dollar has advanced against other world currencies for eight consecutive days:
… which has put pressure on gold:
… as well as on oil (though admittedly, it’s not the only culprit in this case):
So now, the U.S. dollar is back in the green for 2019 and commodities holders are wondering what the heck is going on. It’s partially due to currency traders coming to grips with the reality that U.S.-China trade talks likely won’t yield a deal (or at least, a meaningful one) before the March 1st deadline.
There’s also the ongoing global economic slowdown, and many currency traders (at least for the time being) still view the U.S. dollar as the safest, most liquid, and most universally accepted world currency – hence the recent buying spree in the dollar.
But mostly, this short-term dollar surge has been about the lack of progress in trade talks. Investors are pretty much giving up the idea of a trade deal happening before the deadline, and are instead expecting (or at least hoping for) a deadline extension.
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For example, citing “intellectual property and tech transfer issues,” Barclays currency strategist Juan Prada has set the bar low regarding his expectations. “We have not seen any progress on that front, and I’m not sure we will this week,” adds Prada.
Besides, President Trump last week said that he wasn’t planning to meet Chinese President Xi Jinping this month; that alone should rule out any possibility of a deal being struck by March 1st. And as Bannockburn Global Forex chief market strategist Marc Chandler puts it, “It is hard to see a breakthrough unless and until the two presidents meet.”
Plus, with congressional talks between Democrats and Republicans breaking down over the weekend, another partial shutdown of the U.S. government is a distinct possibility. Again, many investors are standing pat with cash, awaiting a resolution of the foregoing issues.
Commodities holders aren’t the only frustrated investors of late, as the U.S. dollar’s strength has put pressure on the Japanese yen, the British pound, as well as the euro, which has been pushed down to its lowest level since December 14 at $1.127.
The current multi-day run constitutes the dollar’s biggest percentage gain in six months, and it’s in stark contrast to many analysts’ expectations of dollar weakness in 2019, which they expected in the wake of the Federal Reserve’s dovish turn.
After all, the Fed’s hawkishness was largely responsible for the dollar’s strength in 2018. But then, the markets are a complex machine with many moving parts: hard to gauge, and even harder to predict.
Looking to the future (but without making any hard-and-fast predictions), it’s going to be challenging for dollar bidders to maintain the current trajectory and pace. As FXTM research analyst Lukman Otunuga observes, “Any signs of the U.S. economy experiencing a slowdown will most likely accelerate dollar depreciation as its safe-haven status is questioned.”
As for my commodities holdings, I’m sitting tight because I’ve got something tangible that has lasting value irrespective of government gridlock and international tensions. I’m as worried about the dollar as I am about my tax refund arriving early – which is to say, I’m not worried all.
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