(Bloomberg) -- Trade wars are good, and easy to win -- that’s a Donald Trump assertion which is giving succor to dollar bulls.
They see the greenback as a better haven than gold should the tariff tit-for-tat intensify. Four months after the U.S. president shocked equity markets with his vision of higher duties on imports to America, investors are discovering catalysts that should help the nation’s currency withstand trade turbulence better than gold.
“The dollar has become the main destination for safe-haven investors,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by email from Copenhagen. “Geopolitical risk is on the rise, bonds and stocks have sold off and yet gold continues to drift lower.”
The prospect that import tariffs will reduce the biggest economy’s current-account deficit at a time when the Federal Reserve raises interest rates has created a rare opportunity. The dollar can be used both as a haven and in carry trades, according to Andreas Steno Larsen, a global currency strategist at Nordea Bank AB in Copenhagen.
The currency’s hold over gold is strengthened by the fact the metal is usually priced in dollars -- they’re inversely correlated.
Bad Half
With bullion last week posting its worst first-half performance in five years, investors are recalculating how they weight traditional assets. The push is coming from a confluence of events, from Trump’s antagonistic stance toward America’s trading partners, to the fact that the Fed is winding down quantitative easing earlier than its counterparts in Japan or Europe.
The global stocks benchmark MSCI All Country World Index just notched its first back-to-back quarterly decline since 2015, and emerging-market equities posted the first drop in six quarters. Meanwhile the dollar is outperforming most major currencies. As the world’s most liquid bond market offers higher yields, the appeal dwindles for holding an asset bereft of an income stream such as gold.
Meanwhile, the currency strengthened its grip over gold prices, overshadowing other drivers including falling physical demand in India, industrial-demand expectations and dwindling investment flows in exchange-traded funds. About half of gold’s fluctuation since January could be explained by movements in the greenback, regression analysis shows. That’s a stronger bond than in any year in the past decade.
At the same time, the 120-day correlation between the Bloomberg Dollar Spot Index, which was up 1.7 percent this year through July 3, and the S&P 500 turned negative in February. A stronger-than-noise reading of negative 0.3 meant the benchmark indexes moved in opposite directions more than not. A rallying dollar may itself be a headwind to stocks.
A “significant” driver of the dollar’s gains this year has been reduced risk appetite, spurring a tide of capital to dollar assets as emerging markets seize up, according to Jane Foley, head of currency strategy at Rabobank. That said, “the sheer liquidity associated with the dollar means that for some investors it will always be a safe haven,” she wrote in a recent note.
“We’ve seen a very tight relationship between gold and the dollar recently,” Carsten Menke, a commodities strategist at Bank Julius Baer & Co. Ltd. said by phone from Zurich. “It’s very difficult to make money trading gold when the dollar is rising.”