U.S. dollar marches close to parity with euro, hitting 20-year high, and that is not good for gold price
(Kitco News) - The U.S. dollar's unrelenting momentum continues to wreak havoc within commodity markets, and while gold prices have outperformed other assets, it has not been immune to the strong greenback.
Looking ahead, some analysts see the risk of gold prices falling below $1,700 an ounce as the U.S. dollar continues to flex its strength in global financial markets.
Joe Perry, U.S. market analyst at City Index, noted that gold's negative correlation to the U.S dollar index is currently at 0.96. A 1.00 reading would be a perfect correlation between the two assets.
"If the DXY continues to move higher, one could suspect that XAU/USD will be moving lower," Perry said.
One important milestone event for the U.S. dollar that analysts are watching is a move to parity with the euro. The euro is the largest component of the U.S. dollar index. The single currency is trading at its lowest point against the U.S. dollar in 20 years, and many currency analysts expect that it's only a matter of time before it falls to parity with the U.S. dollar.
As the U.S. dollar moves higher against the euro, some analysts warn investors not to take the current price environment too lightly. Many analysts have dismissed the U.S. dollar's rally against the euro as being "the cleanest dirty shirt in the laundry basket," which is something the gold market can eventually overcome.
However, some have said the U.S. dollar is seeing broad-based strength within the global currency market, which is a more challenging environment for the precious metal. The U.S. dollar is trading at a 20-year high against the euro, but it is trading at a 24-year high against the Japanese yen.
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"Everyone is taking a hit against the strength in the U.S. dollar," said Ole Hansen, head of commodity strategy at Sax Bank. "Everyone believes that the Fed will be able to get inflation under control, so U.S. dollars are the preferred currency in the world. I have some doubts, but until there are reasons to disbelieve that the Fed can bring down inflation, investors don't have a reason to hold gold right now."
Hansen said he is watching to see if gold prices can hold critical long-term support at $1,675 an ounce. "That is the consolidation low going back to 2020," he said.
Driving the U.S. dollar's momentum and gold's weakness is the Federal Reserve's stoic commitment to raise the Fed Funds rate to cool inflation pressures. According to some market analysts, Wednesday's inflation report could add more fuel to the U.S. dollar's drive higher.
Last month's Consumer Price Index showed inflation rising 8.6% in May. The hotter-than-expected inflation data caused markets to fully price in a 75-basis point hike from the Federal Reserve, just two days before the committee made its decision.
Heading into Wednesday's report, some economists have said that inflation could jump to 9% in June, forcing the Fed to take even more aggressive measures when it meets later this month. This would continue to weigh on gold prices.
"The precious metal has been smothered by an appreciating dollar and expectations over the Fed maintaining an aggressive stance towards higher interest rates," said Lukman Otunuga, Senior Research Analyst at FXM. "The precious metal looks depressed and could be in store for more pain if the pending US CPI report meets or exceeds market expectations. If prices are able to breach $1700, the next key level of interest can be found at $1680."
Hansen added that before gold prices can stabilize, momentum in the U.S. dollar would have to end, which won't happen until the Federal Reserve shifts its aggressive stance on interest rates.