ATFX: Why Are Gold and the US Dollar Both Plummeting?

Topic: ATFX Forex Column Submission

On March 20, ATFX: In traditional understanding, gold and the US dollar index have an inverse relationship; when one rises, the other likely falls. However, this logic is more applicable to long-term trends, and for the short-term movements of gold and the dollar, it is not surprising for both to rise or fall together. This is because short-term movements are significantly influenced by random factors, and if these factors simultaneously favor or disfavor gold or the dollar, movements outside the traditional inverse relationship can occur.

For instance, currently in the US-Iran conflict, both sides are uncompromising and have their own advantages, with the expected duration of the conflict extending from four weeks to an indefinite period. The movements of gold and the dollar have shifted from divergence to synchronization. Yesterday, gold plummeted, with the market price dropping from a high of 4867 to a low of 4502 dollars, nearing the yearly low point of 4403 dollars. During the same period, the dollar index fell sharply from 100.26 to a low of 98.94, breaching the 100 psychological level. Both experienced significant synchronized declines.

For gold, the outbreak of war between the US and Iran should have bolstered prices due to risk aversion. However, since the start of the US-Iran conflict on February 28, gold prices have plummeted from 5419 to 4502 dollars, a decline of nearly 1000 dollars. For the dollar, the conflict initiated by Trump could lead to a significant victory, elevating the US international status and providing a boost to the dollar index. Conversely, if the US becomes mired in war, its international deterrent power would diminish, significantly impacting the dollar index negatively.

The synchronized sharp decline of gold and the dollar index yesterday occurred because the US-Iran conflict simultaneously presented negative factors for both gold and the dollar index. Iran’s attempt to charge navigation fees in the Strait of Hormuz, although violating maritime conventions, indicates that the current situation of tankers being unable to pass through the Strait may change, which is negative for gold. Meanwhile, the US allowing Iranian offshore oil trading suggests that Trump’s team has no effective measures against high oil prices, resulting in a moderate easing of restrictions on Iranian oil, which is negative for the dollar index.

▲ATFX Chart

In the long term, the dollar index is likely to stop falling and rebound, returning to an upward trend. Conversely, gold may continue to decline due to the rise of dollar assets. Additionally, high oil prices may lead the Federal Reserve to abandon its loose monetary policy and opt for interest rate hikes in the second half of the year, which is also an important long-term bullish factor for the dollar index.

In terms of market trends, the dollar index is operating within the upward channel shown in the chart, and the market price has shown signs of rebounding after touching the lower boundary, indicating that the support of the channel is effective. Before the market price effectively breaks below the lower boundary, it is wise to maintain an optimistic attitude toward the bullish trend of the dollar index.

ATFX Risk Warning, Disclaimer, Special Statement: The market has risks, and investment should be done with caution. The above content represents the analyst’s personal views and does not constitute any operational advice. Please do not regard this report as the sole reference. The analyst’s views may change over time, and updated content will not be notified separately.

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Editor: Chen Ping