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Commerzbank: 'Currency War' Threat May 'Push Investors Further Towards Gold'

Kitco News

(Kitco News) - The threat of a “currency war” may provide fuel for gold to continue its rally, Commerzbank analysts said Thursday.

The dollar has significantly weakened since U.S. Treasury Secretary Steven Mnuchin commented at the World Economic Forum in Davos Wednesday that a weaker dollar would be “good” for the U.S. Previously, since the Clinton presidency, U.S. administrations have tended to support a strong-dollar policy.

Any time a country’s currency weakens, prospects improve for exports from that nation since it makes products less expensive in other currencies. A number of other countries have seemingly favored a weaker currency in recent years, which prompted some analysts to facetiously call this a “race to the bottom.”

The dollar has in fact slid sharply the last two days. The euro has risen from $1.22972 late Tuesday to a high of $1.25378 so far Thursday, the single European currency’s most muscular level since December 2014.

A weaker dollar is supportive for gold since the yellow metal tends to move inversely to the U.S. currency. Spot gold Thursday has traded as high as $1,366.05, its strongest level since August 2016.

“The increase in the gold price was due almost solely to the weak U.S. dollar, as can also be seen from the reaction of gold in euros – it achieved only moderate gains and is still trading below the €1,100 per troy ounce mark,” Commerzbank said.

The German bank later added: “The threat of a currency war, coupled with an uncertain outlook, is likely to push investors further towards gold.”

Mnuchin’s remarks meant an even greater focus on Thursday’s meeting of the European Central Bank to see how policymakers might react, Commerzbank said. The central bank left interest rates unchanged, and analysts said ahead of time that the rising euro likely would make policymakers want to avoid sounding too hawkish.

ECB President Mario Draghi, in his press conference, said Europe would not participate in a currency war, thereby avoiding verbal intervention.

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