Gold prices are following stocks and Treasuries lower this morning, as an ascendant US dollar continues to dominate currency markets. Most of the dollar’s contemporaries are on the skids for various reasons today, lending further strength to the greenback At 10am in New York, spot gold was trading at $1,263.40, down $6.00 from Monday’s close. Spot silver was 16 cents lower, trading at $17.45.
The pressure on markets can be explained by two factors: Interest rates and oil. Oil hit a 15-month high Monday on statements by Saudi energy minister Khalid Al-Falih and Russian president Vladimir Putin that hinted that a production freeze deal was close. The oil rally was halted when the CEO of giant Russian oil company Rosneft told reporters that he would not cap production. “Try to answer this question yourself: would Iran, Saudi Arabia or Venezuela cut their production?” he said. This illuminates the main reason oil production agreements fail. Even if each participant agrees to cut production, they don’t trust the others to not cheat.
Treasuries are being dumped in expectation of a December hike in benchmark interest rates by the Fed. Traders fear that higher oil prices will stoke the flames of inflation and force the Fed to act. The decline in Treasuries demand increases the yield needed to attract buyers. Fed funds futures traders are showing a 70% chance of a December rate hike, according to CME Group’s FedWatch tool.
Higher interest rates boost the strength in the dollar. Therefore, we are seeing increasing bullish bets on the greenback at a time when most of its peers are sharply lower. The British pound continues its freefall, retaining its dubious distinction of being the worst-performing currency in the world. Members of the UK government are touting the upside of a pound that continues to hit fresh three-decade lows.
In China, capital outflows aren’t just in dollars anymore. A substantial amount of yuan is leaving the country, pushing the currency to a six-year low. South Africa’s rand is falling down a pit as the nation’s finance minister is charged with fraud.
Fed In The Driver’s Seat
All these factors mean that the US Federal Reserve may very well be in the driver’s seat, as far as the global economy is concerned. Tomorrow’s release of minutes of the September FOMC meeting will be seen as a road map for Fed action. With three voting members of the Fed’s policy committee dissenting last month in favor of an immediate rate hike, markets will be hyper-sensitive to the phrasing in the report.
A major outside influence on Fed policy is the price of oil. Higher oil prices will affect the costs of a substantial number of everyday goods, increasing inflation. Of course, this is exactly what the Fed wants to see, so it can raise benchmark interest rates further above zero. This will give them more room to react to an economic downturn, without immediately printing money for a new quantitative easing program.
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