Treasury yields rise, dollar index closes above 110 pressuring gold lower

Well before the Federal Reserve enacted its first interest rate hike in March the dollar has been on a dynamic upside surge. In July 2021 the dollar index traded to a low of 89.45 and in just over a year moved to a 20-year high with the dollar index currently trading above 110. When analysts talk about dollar strength it is a little misleading on the surface.

The dollar has lost value and continues to lose value in terms of its buying power. With inflation running over 8% the cost of goods and services continues to mean that the United States dollar has less buying power than it did a year ago, five years ago, or 20 years ago.

The dollar index’s strength represents the dollar as it relates to the basket of six currencies it is paired against. Within this foreign currency basket, certain ones carry more weight. The Eurodollar for example accounts for 56.7% by far the largest component of the index. The Japanese yen is weighted at 13.6%, the British pound at 11.9%, the Canadian dollar at 9.1%, the Swedish krona at 4.2%, and the Swiss franc is weighted at 3.6%.

Because the vast majority of countries have been devaluing their fiat currency by creating excessive monetary supplies, the dollar has been depreciating less than the other currencies it is paired against. So, the term “dollar strength” is simply a measurement of foreign-exchange values of the U.S. dollar when compared against the foreign currencies contained in the dollar index.

As the U.S. yield of debt instruments such as 30-year Treasury Bonds or 10-year Treasury Notes rises a byproduct is that it moves the dollar index higher. That is exactly what we have been seeing as the Federal Reserve continues to raise rates aggressively.

As of 6:10 PM EDT gold futures basis, the most active December 2022 Comex contract is fixed at $1712.80 which is a net decline of $9.80 or - 0.56%. Concurrently the dollar index is currently up 71 points or 0.65% and fixed at 110.22. This means that there was fractional buying in gold today however, a strong dollar accounted for any fractional gains from buyers bidding gold higher and the totality of today’s $9.70 decline in gold.

 Today’s high of 110.55 is the highest level in the dollar index in the last 20 years. On a technical basis, there are no strong areas of resistance between 110 and 120 which is the highs the dollar ran to in 2001.

At some point, the dollar will retrace but as long as the Federal Reserve continues to raise interest rates higher U.S. debt yields will rise. Higher yields will certainly continue to be highly supportive of dollar strength.

Wishing you as always good trading and good health,