Why the US dollar index continues its upward movement

Must know: Key indicators to track gold in 2015 (Part 3 of 12)

(Continued from Part 2)

The US dollar and gold

Gold mainly trades in US dollars (or USD). As a result, a weaker USD makes gold cheaper for other nations to purchase. It increases their demand for gold.

Also, when the dollar starts to lose value, investors look for an investment to store value. Gold is a good alternative. Gold will go up and down depending on the strength of the USD and the US economy.

Tracking USD strength

Tracked by the Federal Reserve, the weekly U.S. Dollar Index measures the value of the dollar compared to its significant trading partners. A rising value means the USD is stronger compared to other currencies. Its value increased from 109.72 on December 9 to 112.06 on January 9, a gain of 2.1% in a month.

In 2014, the USD rose by 9% in value. The above chart shows the performance of the world’s largest physical gold-backed ETFs, including SPDR Gold Shares (GLD) and the PowerShares DB US Dollar Index Bullish Fund (UUP), which tracks the value of the USD relative to a basket of world currencies. The six major world currencies in this basket include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

The strengthening USD

Major currencies that are weakening against the USD are the Japanese yen and the euro. Positive macroeconomic data such as the improving job market and industrial activity in the United States helped the dollar gain against other major currencies.

The strengthening USD is leading to pressure on gold prices. There are other factors that impact the USD. We’ll discuss them later in this series. A stronger dollar has a fallout impact on gold prices, which in turn affect gold stocks such as Goldcorp (GG), Barrick Gold Corporation (ABX), Newmont Mining Corporation (NEM), and Kinross Gold Corporation (KGC), and ETFs such as the Gold Miners ETF (GDX).

Continue to Part 4

Browse this series on Market Realist:

  • Part 1 – Key Indicators to track gold in 2015
  • Part 2 – Speculation of Greek exit leads investors to gold
  • Part 4 – Why US PMI data are different from the rest of the world’s?