Due to the Hawkish Fed, the Dollar Returns... Gold and Crude Oil Lose Momentum

Capital Markets Shake on Early Interest Rate Hike Signal
Dollar Strengthens for Second Day... Biggest Rise This Year
Gold, Crude Oil, Copper Prices Plummet Together

[Asia Economy New York=Correspondent Baek Jong-min] The dollar is back. As the pace of the U.S. economic recovery accelerates and the Federal Reserve (Fed) signals an early interest rate hike, the value of the dollar has soared. The strong dollar has caused a simultaneous plunge in commodity prices such as gold, crude oil, and copper, shaking the global financial markets.

On the 17th (local time) in the New York foreign exchange market, the dollar index, which shows the value of the dollar against major currencies, rose by 0.87%. The dollar showed strength for two consecutive days following the Fed's dot plot announcement signaling interest rate hikes in 2023. As the dollar rose, the euro fell 0.7% against the dollar, dropping 1.8% over two days.

[Image source=Reuters Yonhap News]

The Wall Street Journal reported that the dollar's value rose the most since March 2020 the day before. The dollar had been declining recently as investments poured into U.S. Treasury yields, but it quickly transformed into a "precious asset." Brian Nick, Chief Investment Strategist at Nuveen Asset Management, said, "The pent-up demand to invest in the rising dollar seems to have exploded following the Fed's announcement."

The dollar's strength reflects the Fed's interest rate hikes. As rate hikes were anticipated, U.S. Treasury yields strengthened, attracting demand for the dollar. When U.S. Treasuries rise, dollars circulating worldwide return to the U.S., boosting the dollar's value. Conversely, currencies of emerging markets or countries with delayed rate hikes tend to depreciate.

Goldman Sachs analyzed that the Fed, having turned hawkish, caused trouble for those who had bet on a weak dollar and shorted it.

The strong dollar has become a source of fear for commodity investors. Prices of major commodities priced in dollars, such as gold, copper, and grains, tend to fall when the dollar rises.

Gold, which was racing toward the $1,900 range earlier this month, plunged 4% on this day. Since gold does not yield interest, it becomes less attractive during periods of rising interest rates. Naeem Aslam, Chief Market Analyst at AvaTrade, explained, "The adjustment in the interest rate hike timetable caused a 'tightening shock' in gold prices."

Goldman Sachs analyzed that the Fed, having turned hawkish, caused trouble for those who had bet on a weak dollar and shorted it.

[Image source=Reuters Yonhap News]

The strong dollar has become a source of fear for commodity investors. Prices of major commodities priced in dollars, such as gold, copper, and grains, tend to fall when the dollar rises. A representative example is gold. Gold, which was racing toward the $1,900 range earlier this month, plunged 4% on this day. Since gold does not yield interest, it becomes less attractive during periods of rising interest rates.

Naeem Aslam, Chief Market Analyst at AvaTrade, explained, "The adjustment in the interest rate hike timetable caused a 'tightening shock' in gold prices."