As global investors grow intolerant of the White House, we expect to see further weakness in the US dollar, with attendant benefits for the gold price. Unit purchases of this precious metal become more alluring in non-dollar currencies, amplifying demand.
But just how low will the dollar go? Washington seems to be doing very little to defend the value of the currency. Undermining the independence of the Federal Reserve with jabs at its leadership and inflating the federal deficit with that notorious tax-and-spend bill are two obvious examples. The apparent reason to disparage the dollar is an attempt to support US exports, which become increasingly uncompetitive when the dollar is artificially strong.
The problem with the White House argument is that it is either murky, linear, or pedestrian, depending on your frame of mind. One counterpoint: A strong dollar helps to keep inflation under control, while empowering the federal government with a license to print money. US Treasuries, in turn, are often purchased by foreign investors, who may evaluate their commitment through a foreign-exchange lens.
There is an underappreciated component of political elan here. Manufacturing as a percent of economic activity tends to be higher in states that are essential Republican strongholds. The economies of the Midwest, such as Indiana, have a much higher manufacturing component than those in the Northeast, like New York.
The relationship between a weak US dollar and strong gold price will remain intact for the foreseeable future. Most notably, the strength of the Chinese yuan against the American currency is dominant consideration, given the scope of Chinese gold purchases, both at the central bank and retail level. ■
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