Dollar woes: The great gold/Euro hedge

Gold

On such consequences is the price of Gold. It's on a spectacular rally, rising 45% in value since start of the year going through the €3,800 per troy ounce value this week. No other asset has risen by so much and it's on its strongest growth in value since 1979 and the Iran revolution and oil crises that followed.

The rise of Gold

Why is this? Well, some have pointed to the recent wranglings over the US budget and latest shutdown in federal agencies due to a failure to reach a deal but I'm not so sure that's the biggest factor here. 

What seems more likely is a number of other factors, chief among them being economic data pointing to a slowing economy in the US. If such a slowdown occurs it's likely the Federal Reserve will lower US interest rates meaning lower returns on cash holdings of USD. Investors looking to hold an asset which can generate better returns and is currently more stable are turning to gold.

But other factors are at play. Analysts point to the US administration's recent war of words with The Fed casting doubt over its independence and an increase in central banks globally increasing their gold reserves to deleverage out of USD as also driving up gold prices.  

Add in a general market belief that inflation remains sticky but that interest rates will stay at their current levels, and it all contributes to a flight to safety and there is no other asset as safe as gold.

The Euro

But it's not just gold having a moment. The Euro is also on a strong rally and again it's USD which is the loser.

So far this year the Euro has appreciated over 12% against the USD and the prediction is that it will go higher and break through the $1.20 level.   

Why? Well again it seems that hedging against the USD is the primary reason for this drive in value and it's to the Euro, along with gold, that investors are turning.

Other reasons are helping the Euro as the graph above shows, from the German stimulus package to Trump's "Liberation Day" but the belief is further USD weakness is in the pipeline and the Euro will be the main beneficiary.

It's not all good news of for the Euro though. A strong currency vis a vis USD will of course make Eurozone exports to the US more expensive and couple that with the new tariffs and there are potential problems brewing for EU policymakers, but for now, the trend seems to be only upwards.

USD weakness

I think this is an interesting trend playing out here. Clearly markets are worried about the USD's stability and what current US policies and geopolitical positioning is having on its traditional role as the global reserve currency.

A significant hedge against US is taking place and gold and the Euro seem to be the beneficiaries. Let's see if that continues and if USD can regain some of its lost lustre.

Written by: Aaron McGarry