Helena Lyng Blak
5 weeks ago

The Golden Distortion: A Strange New Development in the Relationship Between Gold, Dollars, and Asian FX

Explore the shifting dynamics between gold prices, the US dollar, and Asian foreign currencies in an evolving economic landscape.
corlaffra / Shutterstock.com
corlaffra / Shutterstock.com

Historically, the trajectory of the value of gold has often been in opposition to that of the United States dollar.

But now, that relationship seems to have changed–and quite significantly.

“Gold rallies have historically coincided with a weaker USD. Recently however, the relation has flipped, as the two have performed in tandem,” says financial analyst at Steno Research Elias Lisberg.

And the case grows curiouser: Lisberg explains that this unison performance is particularly against Asian FX which is “generally trading on the back foot,” he says.

“While the inverse USD/Gold relationship has broken, the dollar yield/Asian FX correlation remains intact, which, to some extent, leaves Asian dollar bond investors protected from yield volatility from a domestic currency perspective,” he elaborates.

Lisberg highlights that were this relationship to change, similar to what happened with the US dollar and gold, investors in Asian dollar bonds might face problems from both rising yields and a weakening dollar compared to their local currencies.

“Debasement risks in Asian currencies are still considered material,” Lisberg says. “Which in turn is good news for energy and precious metals as both work as release valves for the continued downside pressure.”

The analyst expects the US dollar to remain strong in the coming week. This is due to rebalancing efforts in the real money sector. Over the longer term, he also expects the dollar to be supported by larger differences in inflation rates between the USD-EUR and USD-CNY.

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