Tuesday morning saw an early jump for gold prices that subsequently eased back from its highs. After hitting $1,271 per ounce spot gold settled about $4 higher than its opening price in New York at 10 am, trading near $1,269/oz.
The best candidate for explaining why gold gave back some of its early morning gains is the rising U.S. dollar. Thanks in part to improved consumer sentiment and a pickup in inflation, the dollar has been on a tear of late. The DXY dollar spot index was trading above 99.0 on Tuesday morning, its highest level since the end of January. Third-quarter earnings for Wall St have also been relatively strong.
The Chinese yuan fell to a six-year low against the dollar overnight—its weakest exchange rate with the USD since September of 2010. The euro similarly fell against the greenback, slipping below $1.09. The pound sterling remained at its weakest in over three decades, though equities in the U.K. have been getting a boost thanks to the drop in the currency. The FTSE 100 was up over 1%. However, concerns about banks leaving London due to Brexit are potentially threatening the city’s status as the epicenter of the financial world.
The positive feelings regarding the economy were not limited to the U.S., either. Germany’s measure of the country’s business climate reached a two-and-½-year high while the benchmark DAX stock index vaulted to its highest mark so far in 2016.
One of the factors driving the dollar higher is the expectation that the Federal Reserve is finally planning to raise interest rates this December after two years of perpetual hand-wringing over monetary policy. A higher federal funds rate would be appropriate if the Fed believes that economic activity is starting to overheat. Generally, higher interest rates cause a country’s currency to appreciate.
This is certainly the tenor that Fed officials have struck of late. While the Fed’s Board of Governors and the FOMC generally express competing opinions about how to best manage the economy, the past few weeks have seen a largely one-sided deluge of Fed rhetoric that implies the time for a rate hike has come. In fact, the CME’s FedWatch tool shows that expectations for a December rate increase of 25 basis points has risen from 68% yesterday to over 71% this morning.
The belief that action will be taken for the first time this year in regard to changing monetary policy has raised a recurring question. How will lawmakers respond to moves by the central bank? Fed officials—along with their peers around the world—have admonished legislatures paralyzed by partisan gridlock to enact fiscal stimulus (i.e. spending) to match their stimulus policies of low interest rates and growing balance sheets. Although there has been no will in Congress to do so thus far, both major party presidential candidates have expressed a willingness to introduce big spending programs to boost the economy.
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