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Gold Market Winning The Currency War - Analysts

Kitco News

(Kitco News) - Rhetoric over a potential global currency war continues to heat up, prompting renewed interest in gold on the back of a weaker U.S. dollar.

Markets continue to react and digest comments made by U.S. Treasury Secretary Steven Mnuchin at the World Economic Forum in Davos, Switzerland. On Wednesday, Mnuchin said that a weaker U.S. dollar has been “good” for the U.S. economy, reversing a decades-old policy supporting a strong U.S. dollar.

U.S. President Donald Trump has supported the idea of a weaker U.S. dollar as it can potentially boosts the nation’s exports since products are less expensive in other currencies.

In a report Thursday, commodity analysts at Commerzbank equated the comments to the start of a currency war. Jasper Lawler, head of research at London Capital Group, agreed that it looks like the latest comments from the Trump administration are the first shots in a global currency war.

Lawler said that he expects to see the U.S. dollar to continue to trend lower through 2018, which will benefit the gold market. The U.S. dollar Index is currently trading at three-year lows at 88.59 points. At the same time, gold prices are trading near a 1.5-year high at $1,359.10 an ounce.

“2018 has so far seen a relentless sell-off in the dollar and with a distinct lack of any obvious catalysts on the horizon that could change the fortunes of the dollar in the near term, the outlook for the greenback doesn’t point to an improvement any time soon,” he said.

He added that the Europe abdicated to the U.S. Thursday as European Central Bank President Mario Draghi said that the central bank wouldn’t compete in a currency war, which pushed the euro to its highest level since December 2014.

“We will not target our exchange rate for accommodative purposes,” Draghi said Thursday.

Draghi said that Mnuchin’s comments don’t just have implications in foreign-exchange markets but questions “the status of international relations.”

While Europe appears to be losing the currency war, Lawler said that there are other global players to keep an eye on.

“China could be the foe to watch; USDCNH just hit 6.3 – a potential line in the sand for the PBOC [People’s Bank of China],” he said.

Lukman Otunuga, research analyst at FXTM, said in an email response to Kitco News that it might be a little too early to declare the start of a currency war, even if the risks have risen.

He added that he remains bearish on the U.S. dollar as markets continue to digest Mnuchin’s comments.

“The dollar is likely to remain depressed moving forward, as anxious investors ponder over the possibility of a potential currency war scenario. The dollar index remains heavily bearish on the daily charts with 88.00 in sight,” he said. “[Gold] remains firmly bullish on the daily charts with further upside on the cards amid a vulnerable US Dollar.”

Draghi isn’t the only global official to show concerns. In Davos, the managing director of the International Monetary Fund Christine Lagarde said that with so much going on in the global economy, “it’s not time to have any currency war.”

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