A runaway rally for the U.S. dollar over the last two trading days is placing a damper on markets today, especially as concern about the fast-approaching rate hike for the Federal Reserve would seem to indicate still more room for the USD to run. With the euro falling on the beginning of the ECB’s QE plan, shares were in the green across Europe. Crude oil prices also saw some support this morning, although they have been rather weak of late. With the strength of the dollar, each of the precious metals was dipping into the red this morning, pushing gold slightly below $1,160/oz. U.S. stock indices were pointing toward a rebound this morning after yesterday’s sell-off.
Yesterday in the Markets
The stock markets were way down, with each U.S. index nearly 2% in the red, erasing the market’s gains so far in 2015. The precious metals each fell modestly, with platinum leading the way.
Factors Affecting Gold Today
Although India is seeing an uptick in gold buying with the dip in prices, the yellow metal is finding it difficult to bounce from its 3-and-1/2-month low. So long as the dollar keeps rising, dollar-denominated gold buyers will continue to see prices drop. Even at $1,157/oz this morning, the gold price has maintained a $30 spread above the platinum price; the further platinum drops, the more palladium (still above $800/oz) would seem to generate demand as an alternative.
The robust strength of the dollar was evidenced by the sharp rise on the DXY dollar spot index, which surpassed the 99.0 mark this morning. This is the highest the index has registered in over a decade; the last time the dollar touched 100.0 on the scale was in 2002. Since the euro makes up the majority of the currency basket against which the dollar is compared for the purposes of the DXY, the slide by the euro under $1.06 (a 12-year low) is definitely fueling the rally. The yen has also weakened to over 121 to the dollar.
Emerging markets, meanwhile, have been falling ahead of the expected Fed rate hike, which could come as early as June according to analysts. In large measure, nobody wants to invest their capital overseas, either in bonds or equities, until the picture from the Fed about its monetary policy becomes clearer. A rate hike will likely cause the dollar to appreciate further, but its affect on the Treasury market remains to be seen. Yields have been on the rise in the U.S. while most of the rest of the developed world already has funds overcrowded in bonds, driving short-term yields into negative territory.
Speaking of Fed policy, Chair Yellen had a face-to-face meeting yesterday with Alabama Senator Richard Shelby (R) about Congress’ concerns that the Fed needs to do a better job regulating its regional branches, particularly the powerful New York Fed. The tension between greater oversight and Fed independence is at the heart of the matter. It appears that there is bipartisan support for legislation that reorganizes the FOMC’s voting structure; this would take the place of Kentucky Senator Rand Paul’s (R) proposal to audit the Fed, a fairly unpopular measure that is unlikely to make it out of the Senate. Although Yellen did not speak to the media after the meeting with Senator Shelby, the move still signals some optimism about greater cooperation between Congress and the Federal Reserve.
Thursday is an incredibly busy day of news, especially in the U.S.: weekly jobless claims, retail sales numbers, import and export prices, business inventories, the EIA natural gas report, as well as the Fed balance sheet and money supply will all be announced. Looking abroad, Germany, France, and India all will release their CPI data.