The U.S. dollar is rallying to its highest level in two months, fueled by persistent geopolitical risks in the Middle East and a sharp reversal in interest rate expectations, putting significant pressure on gold prices.
"Inflation worries have gripped global bond markets," said Frederic Neumann, chief Asia economist at HSBC, in a note. "With little prospect of a quick restoration of Gulf energy flows... inflation across the world is set to push higher in the coming months.”
The U.S. Dollar Index (DXY) has gained 1.01% over the past five days, its strongest weekly performance in two months, according to TradingView data. The index is up 1.19% over the past month. The rally comes as money markets, which had been pricing in Federal Reserve policy easing just a month ago, now see a growing chance of a rate hike. The probability of a rate increase by the Fed's October meeting has surged to 28.9%, up from just 1.1% a month prior, according to the CME FedWatch tool.
The dollar's strength is a direct headwind for gold, which has fallen to a 1-1/2-month low. A stronger greenback makes dollar-denominated commodities like gold more expensive for holders of other currencies. Higher U.S. interest rates further dull the appeal of the non-yielding metal. The ongoing conflict in the Middle East, which has traditionally been a catalyst for gold, is instead bolstering the dollar through safe-haven flows and the United States' position as a major energy exporter benefiting from higher oil prices. "Rising foreign investment into U.S. fixed-income assets and technology equities could help reinforce the dollar’s upward momentum," Valentin Marinov of Credit Agricole said, per Bloomberg.
This article is for informational purposes only and does not constitute investment advice.
