 US Gold vs Dollar: How does dollar affect gold price? |
Source |
American Shipper |
Post Date |
07/07/2025 |
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Goldsperformance is influenced by geopolitics, trade wars, and central bankreliance, with negative consequences affecting the dollar index and gold.
Goldhas had a phenomenal run for the last three years. Most investors, includingmarket analysts, were caught off guard by the continuous record highs in goldprices.
Afterrising more than 20% in 2023 and 2024, gold is already up over 27% so far in2025. Gold reached its all-time high of $3,500 on April 22, and it took justunder 30 months for the price to double.
Manysay nothing is startling in gold? spectacular performance. Gold is shiningbecause the ?orld is burning?
But,as of now, most of the geopolitical factors that contributed to the gold pricesurge appear to be fading away.
Yes,the impact of the Russia-Ukraine conflict or the Israel-Iran war on the worldeconomy seems relatively calm. Also, the trade wars among nations, especiallythe US and China, due to Trump tariffs, are no longer threatening the worldeconomy.
The New Trigger for Gold
Oflate, the US dollar (USD) has been touted as the next big reason for the goldbull run to continue.
But,you may ask, what has the dollar got to do with gold prices? Well, the USDollar plays a big role in determining the price of gold. Let? break it down.
Goldhas an inverse relationship with the dollar. But wait. How would the dollar?relative strength be determined? After all, there are hundreds of currencies,just as many countries.
Herecomes the importance of the dollar index, which measures the currency?strength against a basket of six other currencies.
Whenthe dollar index strengthens, the gold price falls, and vice versa. That? whathistorical data shows.
Let?look at a real example to know how currency weakens or strengthens. Assumingthe USD-INR exchange rate today is Rs 85 to a dollar. If the exchange rate goesto Rs 90, it means the INR has weakened, USD has strengthened. Similarly, ifthe exchange rate goes to Rs 80, it means the INR has strengthened, USD hasweakened.
Nowcomes the tricky part. When the dollar strengthens, investors t to movemoney into dollar-denominated assets. And, not in a non-yielding asset likegold.
Thereason is obvious. You want to be in a currency or asset that protects itsvalue at the very least. A strengthening dollar does just that.
Conversely,if the dollar weakens, money makes its way out of dollar-denominated assetsinto gold.
And,this is what is happening now. In 2025, so far, the US dollar index has pedalmost 12% and trades at 96, a multi-year low. It? the dollar? sharpest fallsince 1973.
Why is the US dollarfalling?
So,why is the dollar index ping? After all, the US dollar is also considered asafe-haven place to park funds and is the defacto global reserve currency. USTreasuries are held by global investors, including the central banks of Japanand China.
In2024, the dollar index was steady around $103-$105 levels and startedstrengthening around the US elections in November. By the time it was clearthat Trump would get a second chance to enter the White House, the dollar indexreached a high of over $109.
Butthen, once Trump announced the reciprocal tariffs on the trading nations, itwas all over for the dollar. Trade wars are expected to unleash currency warsin which the US dollar could be the biggest casualty.
There?another action of Trump that? leading the dollar downhill. Trump has beenputting pressure on the US Fed chief Powell to cut rates aggressively. Also,new names are popping up as a replacement for Powell when he retires next year.All these tactics question the indepence of the US Federal Reserve, puttingpressure on the US Dollar.
That?not all. Trump? ?ne big, beautiful bill?is expected to increase the US debtby over $3.9 trillion. Citing worries about growing public debt and a wideningbudget deficit, the US credit rating had already been downgraded by Moody?Ratings.
Here?how numbers stack up: In 2024, the US GDP was $28.83 trillion, much less thanthe $35.46 trillion of debt America carries. With a debt-to-GDP ratio of 123percent, economists feel it is a big red flag when it comes to repayment ofdebt by the US.
Theinterest cost in servicing US debt is already huge and will increase afterTrump? tax bill. 16% of the total federal sping in fiscal year 2025 isalready towards servicing the interest on US debt.
What happens if the USdollar s?
Thereare a lot of implications for the US economy if the dollar index falls.
Thetrust that US Treasury bonds enjoyed will no longer be the same. Globalinvestors will reduce exposure to US bonds to shield themselves from furtherloss. And of course, borrowings will become costly for the US government (lessdemand for treasuries would lead to higher interest rates). This could putadditional pressure on the dollar index and pull it down further.
What happens to gold whenthe dollar weakens?
TheUS dollar? decline provides a boost to gold prices, making dollar-denominatedcommodities, including precious metals, more attractive to internationalbuyers.
Yousee, as explained earlier, when the US Dollar weakens, there? a tency ofmoney invested in US dollar-denominated assets to move to natedestinations. This happens as investors move to protect the value of theirholdings.
Whenthe money moves out, it ultimately needs to go somewhere else. And this iswhere gold comes in. The traditional store of value.
Thedemand for gold increases in times like these as investors prioritise thesafety of capital above all else. The more the panic, the more the demand forgold. And correspondingly, the higher the prices.
Road Ahead
Overall,the dominance of the US dollar is under threat, even though it still commands aprominent position in world trade. The performance of gold will dep largelyon geopolitics, trade wars, and the reliance on gold by the central banks.
Anynegative fallout of these factors will impact the dollar index and subsequentlygold.
Theroad ahead for gold, therefore, could be tricky as multiple factors are atplay. Navigate the gold rally carefully.
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