US Dollar Hits 1-Year High, Correlation Between Dollar/Metals Weakens

by Raul de Frutos on NOVEMBER 16, 2016

Style: Market Analysis

The U.S. Dollar index, which tracks the performance of the dollar against a basket of currencies, hit a one-year high following President-Elect Donald Trump’s victory last week.

Investors expect Trump’s proposals to boost fiscal spending, cut taxes and loosen regulation. They also believe he will accelerate economic growth and boost inflation, bolstering the case for the Federal Reserve to lift U.S. interest rates. Expectations for an interest-rate hike in December’s meeting have risen to more than 80%, up from 30% at the beginning of the month. Higher rates make the currency more attractive for yield-seeking investors.

Is The US Dollar’s Rally Sustainable?

Investors are pricing in the effects Trump’s proposed new measures, way before we actually see implementation. Moreover, Trumps’ proposals to renegotiate key trade agreements could be negative for global growth, which could weigh on the domestic economy and the dollar.

Also, it’s important to note that the U.S. dollar is near long-term resistance, a level that prevented the index from rising several times in previous years. Investors might be getting ahead of themselves by driving the dollar up so sharply without waiting for the actual effects of Trump’s proposals. Investors might want to think twice before pushing the dollar above current levels.

The Dollar and Metals Lose Correlation

The dollar and metals tend to move in opposite directions. This inverse correlation hasn’t worked lately. This is because the dollar is rising on expectations of higher rates but, at the same time, metal prices are getting a boost on China’s strong demand and Trump’s plans to spend big on the nation’s infrastructure. See the post my colleague, Jeff Yoders, recently wrote about InfraTrumpture.

Metal buyers need to watch the performance of the industrial metals complex first and then look for secondary indicators such as the dollar. This is particularly true during this period, in which the relationship between the dollar and metal prices seems to be weakening for the reasons explained above.

What This Means For Metal Buyers

In theory, a rising dollar is bearish for metal prices. However, this might not hold true in the short- to mid-term. On top of that, there are reasons to question the sustainability of the dollar’s rally. To conclude: It’s important to keep a close eye on the recent dollar strength. However, it is first and most important to focus on the overall metal complex, which is in full bull mode.