U.S. Stock Market and Dollar Move in Opposite Directions in 2017.
The Dollar Index* has confounded market followers since the surprise election victory of Donald Trump over Hillary Clinton last November. Market pundits projected gloom for the dollar and stock market if Donald Trump was elected. Gold bugs, sensing the possibility of such a scenario, placed their long bets in advance of the election. When it became evident that Mr. Trump would emerge victorious on election night, the conventional market wisdom kicked in. U.S. stock markets and markets around the world plummeted, the dollar fell and gold and silver soared.
Within twenty four hours the conventional market wisdom got turned on its head and markets and reversed and headed higher and gold and silver fell. A new market narrative emerged, a President Donald Trump would be good for the stock market as he had promised tax reform and infrastructure spending. That narrative has pushed the U.S. Dow Jones Industrial Average from about 18,300 to over 22,000 in mid-August 2017, a gain of about 20%.
The Dollar also reversed and headed higher after the election of Donald Trump and was boosted further in mid-December when the Federal Reserve raised the Fed funds rate a quarter of a percentage point and promised more rate hikes in 2017. The Dollar Index, however, has fallen steadily since the beginning of the year. The Dollar Index stood at 103 at the beginning of 2017, and despite two more quarter percentage rate hikes, one in March and one in June, the Dollar Index has fallen almost 10% to about 93 by the third week in August.
Political Turmoil Weigh on the Dollar
Since the election of Donald Trump, there has been a steady stream of potentially destabilizing media stories surrounding the President, from election recounts, to battles over his cabinet appointees, to charges of Russian interference in the election and most recently, charges that the President is mentally unfit for office and racist. The President’s incessant battles with the press and his own Republican Party have added to a sense that the Trump Administration and indeed the country is divided. The cumulative impact of the foregoing events have weakened the dollar.
Gold and Silver
A rising gold price is generally reflective of a falling dollar. Year to date gold is up about 10%, while the Dollar Index is down about the same percentage. While gold hasn’t risen and fallen counter lockstep with the Dollar Index on a daily or weekly basis, the correlation has held over the first seven months of 2017. Gold closed Friday August 25 at $1,290.80 an ounce, up 0.5% from a close of $1,283.80 last Friday. Gold closed 2016 at $1,151 an ounce.
Silver’s price action is much more volatile and not as neatly tied to the fortunes of the dollar as gold often is. The price of silver generally follows the direction of the price of gold. If gold rises, silver usually rises more, when gold heads down, silver usually falls more. This year, however, gold’s price appreciation in dollar terms is nearly twice as great as silver’s. Year to date silver is up about 5% compared to gold’s rise of about 10%. Silver closed Friday August 25 at $17.05 an ounce, down 0.3% from a close of $17.10 last Friday. Silver closed 2016 at $16.33 an ounce.
The Euro and The Pound
The Euro has been a direct beneficiary of the dollar’s decline so far in 2017, climbing consistently against the dollar. The British Pound has also managed to break out of its range bound lows set around $1.25 last June after the Brexit vote.
The Euro closed the week at $1.19 up from $1.06 at the end of 2016 and up from its multi-year low of $1.04 in late December 2016.
The Pound closed the week at $1.29 up from $1.23 at the end of 2016 and up from the low of $1.20 hit in January 2017.
The price of oil has fallen approximately 13% this year, a percentage decrease greater than the Dollar Index;s 10% decline. Generally, oil and the Dollar Index don’t share a correlation in price. Oil has declined all year on increased global oil production, led in part by increased US shale oil production. Talks of OPEC and Russian production freezes helped push oil up in 2016, from its lows around $30 a barrel to nearly $55. Oil closed the week at around $48 a barrel.
Having raised interest rates three times since December 2016, the majority of Fed observers expect no more than one rate hike and perhaps none for the remainder of 2017. Attention is turning increasingly towards the debt ceiling that may be reached as early as October 2. The drama surrounding raising the debt ceiling may cause further declines in the Dollar Index and increases in the prices of precious metals. The unknown is what would happen if indeed the debt ceiling drama turned into reality and the U.S. Congress failed to pass a resolution allowing the debt ceiling to be raised and the U.S. Treasury misses one or more debt payments. Currently, Treasury Secretary Steven Mnuchin is confident that won’t happen.
If tax reform and infrastructure spending bills, the underpinning of the 2017 stock market surge, do not pass this year, one might reasonably expect the stock market to give up its gains and perhaps more.
* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.