Daily Market Comment – Dollar selloff eases; gold pulls back after setting fresh record


Raffi Boyadjian, XM Investment Research Desk
  • Dollar crawls higher as Republicans finally unveil new stimulus proposal
  • Gold touches $1,980/oz before pulling back, eyes dovish Fed
  • Wall Street turns positive ahead of key earnings, likes weaker dollar

Dollar attempts to end losing streak

There was some respite for the US dollar on Tuesday as the heavy selling that has sunk the currency to more than two-year lows eased a little. The dollar index fell for the seventh straight session on Monday as signs of a faltering recovery in the United States have reinforced expectations that the Federal Reserve will likely increase monetary stimulus in the coming months. At the same time, countries that have had more success in containing the coronavirus seem poised for a much more V-shaped looking recovery than the US.

This marks a sharp turnaround from just a few weeks ago when it was the US recovery that looked robust and investors were more worried about the Eurozone. But the tables turned after EU leaders finally sealed a deal on a big fiscal package, while the US is still tackling a second wave of infections.

The shifting growth outlook has injected new life into the euro, which yesterday hit a 22-month peak of $1.1781. The rally has paused for breath today amid a stronger greenback, which is being supported by higher Treasury yields. The pound and the commodity dollars were also softer after climbing to fresh highs overnight.

There could be more gains in store for the dollar if Congress is able to reach an agreement on a new fiscal stimulus bill in the next few days before the existing measures expire. The White House and the Republican party have only just agreed on a new pandemic relief package, leaving little time to negotiate a bipartisan deal.

But although markets have little doubt that Democrats and Republicans will be able to find a compromise because too much is at stake if they don’t, any delay could still leave a hole in the pockets of millions of Americans until the new federal payments kick in, meaning consumption would take a big hit in the meantime.

Gold reverses lower from record highs

A deal on another US virus stimulus bill would also be bad news for gold, at least in the short term, if it takes the pressure off the Fed to do more.  The excessive gains of the past week make the precious metal extremely vulnerable to a downside correction. Gold is already seeing a strong pullback from earlier in the day when it briefly topped $1,980/oz for the first time.

However, the broader outlook for gold is likely to stay quite bullish as the flurry of global monetary and fiscal stimulus is not about to end anytime soon, while the dollar will struggle to reclaim its throne as long as the virus situation in the US remains out of control.

In fact, the opportunity for gold to resume its relentless uptrend could come as early as tomorrow if the Fed, as expected, strikes a very dovish tone. Although the Fed is not anticipated to announce any changes to its emergency policies on Wednesday, Chairman Powell might signal a revamped forward guidance as well as sound downbeat on the US economy.

Busy earnings day ahead

Dovish soundbites could cause fresh pain for the dollar but be positive for stocks. US equities started the week on a firmer note after coming under pressure last week. A combination of factors, including doubts about the recovery and rising Sino-US tensions, has forced many investors to rethink their rosy outlook.

If more evidence emerges in the coming weeks that the economic rebound has hit a stumbling block and Wall Street suffers further losses, a weaker greenback is likely to limit the selloff as a lower exchange rate would be beneficial for internationally exposed companies.

Today, however, the focus will be on the earnings announcements from the likes of Pfizer, Starbucks, McDonalds and Ebay. US stock futures were trading flat ahead of those releases.