Summary of Key Points
Recently, the US dollar index reached a 13-month high, mainly due to increased expectations for interest rate hikes by the Federal Reserve (FED) (collective hawkish statements from officials and significant increases in market bets on hikes in July and September) and the inflow of safe-haven funds triggered by the sell-off in tech stocks. Meanwhile, international gold prices tumbled by more than 3%, falling below the $4,000 mark. The main reasons are rising interest rates, which suppress the value of interest-free assets like gold, combined with a reversal in market sentiment from expectations of rate cuts to hikes. Additionally, major currencies such as the euro, pound, and yen weakened against the dollar due to its strength. There is divided opinion among institutions regarding their future trends: the dollar's upward momentum may be limited as positive factors have been largely priced in, while gold is under short-term pressure but supported by central banks' continued gold purchases.
I. Why Has the Dollar Suddenly Become More Attractive?
There are two key reasons for the recent strengthening of the dollar:
1. Increasing Expectations for Rate Hikes: Recent hawkish statements from FED officials have boosted market confidence in rate hikes. According to CME data, the probability of a hike in July has jumped from 9% to 35% within a week, and for September, it has soared from 29% to 70%. Higher interest rates mean higher returns on dollar assets (such as US bonds), attracting more global funds.
2. Safe-Haven Funds Flocking to the Dollar: The recent sharp declines in tech and semiconductor sectors have caused significant market volatility, prompting investors to move their money into the safest assets, namely the dollar and US bonds. After all, the dollar is globally recognized as a safe-haven currency.
However, some analysts warn that the market may have already fully priced in the benefits of rate hikes, limiting the dollar's further upside potential.
II. Why Did Gold Fall Below $4,000?
The main reasons for gold's decline are rising interest rates and a reversal in market logic:
1. Interest Rates Rising, Gold Losing Appeal: Gold does not generate interest, so when bank rates or bond yields increase, holding gold becomes less attractive. For example, if you can earn 3% interest by depositing money in a bank, you would naturally choose that option over keeping it in gold.
2. Complete Reversal in Market Logic: The gold bull market in 2025 was based on expectations of FED rate cuts and expected appreciation of gold. This year, however, the Iran conflict has pushed up oil prices, leading to inflation, and the FED has shifted to a hawkish stance. Market expectations have reversed, with investors now selling gold and buying dollar assets instead of waiting for rate cuts.
3. Diversified Capital Flow: There has been heavy funding in the AI sector, drawing attention away from gold. Additionally, gold ETFs (funds that invest in gold) have been redeemed in large quantities, resulting in a loss of over 200 tons of holdings and further dragging down gold prices.
III. Why Are Other Currencies Weakening Against the Dollar?
As the dollar strengthens, other currencies weaken:
- Euro: At a one-year low, depreciating by more than 2.5% in June due to market concerns that the European Central Bank (ECB) may not raise rates, making the euro less valuable compared to the dollar.
- Pound: At a seven-month low, also under pressure from the dollar.
- Australian Dollar: As a risk currency linked to commodities and economic cycles, it has weakened due to mixed inflation data in Australia, leaving investors unsure about whether the RBA will raise rates.
- Yen: Approaching its worst level since 1986 (1 USD = 161.66 JPY). Japan's officials' verbal warnings have been ineffective, and the government is even considering using foreign exchange reserves for intervention. Despite the RMB raising interest rates to 1% (a 31-year high), the yen's weakness persists against the dollar.
IV. What About Future Trends?
There are differing views among institutions on future market movements, but the core logic is clear:
- Dollar: The short-term upward trend continues, but analysts suggest that positive factors have been largely priced in, making further gains difficult.
- Gold: Short-term prospects are bleak (weak ETF demand and persistent rate hike expectations), but there is long-term support:
- Many banks (such as Morgan Stanley and Goldman Sachs) remain bullish on gold in the long term, provided there is a significant resurgence in gold ETF purchases and a decline in oil prices that would reverse market expectations of rate cuts.
- Central banks' continued gold purchases provide a crucial support. Last year's gold bull market was driven by central bank buying; this factor remains important. Standard Chartered Bank notes that if central banks continue to buy gold, it could offset the negative impact from ETF redemptions and support gold prices.
In summary, the current market's main contradiction lies between expectations of FED rate hikes and global capital flows. The trends of the dollar and gold will continue to evolve around this conflict. Individual investors should pay close attention to FED statements and inflation data.