THE DOLLAR IS GOING DOWN / MACLEOD FINANCE

The dollar is going down

Gold is leading the way to a weaker dollar, driven by a Fed on the back foot regarding interest rate policy. Recession plus higher inflation in 2026 will be the real problem

ALASDAIR MACLEOD

From the chart above, we can see that the dollar’s TWI and its value in gold have broadly tracked each other so far this year. 

They are obviously sending the same message, and it is to do with the dollar rather than speculative buying interest in gold. 

But in the last week or two, the dollar has fallen against gold and not its TWI — yet. 

However, there is reason to think that the TWI will follow gold, both pointing to a weaker dollar.

In the next few weeks, markets will absorb the implications of prospective Fed policies. 

Friday’s unemployment figures confirmed that the US economy is stalling and that the Fed must give a greater weighting to unemployment over inflation. 

Speculation will grow that further cuts in the funds rate will follow, which will weaken the dollar against other currencies even more and also gold.

Gold appears to be leading the way, signalling a dollar devaluation. 

Indeed, the trade weighted index chart looks abysmal, at the same time as gold is hitting new highs:

The Fed downgrading the importance of the inflation target also signals that President Trump has been right in his spat with Jay Powell who will be eating humble pie. 

And with the Fed on a back foot, it is effectively ceding control over interest rate policy to the president, who not only wants interest rates significantly lower, but the dollar as well. 

This is what the gold price is bound to reflect.

That is not all. 

There have been some extraordinarily naïve comments by mainly Trump supporting economists about the outlook for consumer prices, who have pointed out that there appears to be minimal impact from Trump’s tariffs. 

Their error is to dismiss the time lag between higher import prices and their consequences for consumers. 

There is very little doubt that the CPI inflation rate will pick up in 2026 substantially.

Indeed, this is the problem with which the Fed has been battling. 

The danger of cutting rates too early is that they will have to be raised more subsequently, at a time when the economy is already weakening. 

And it won’t be helpful having a capricious president panicking.

Bearing in mind that foreigners hold $40 trillion directly invested in financial assets and deposits, it is surprising that that have not already panicked. 

To some extent dollar bond yields higher than those of governments in the Eurozone and Japan act as a disincentive to sell US treasuries. 

But that balance is now due to shift, leading to yet higher bond yields out along the curve. 

The long bond is already signalling this development:

As a gut reaction, the yield declined slightly on Friday on the employment numbers. 

This is almost certainly a mistake, and a subsequent move above 5% as the year-long consolidation period ends is likely to cause a selloff in equities.

In short, the outlook is for a gathering sense of a deepening recession coupled with inflationary pressures — the Keynesian’s nightmare. 

It will be bad for the dollar, bad for bonds, bad for equities, and good for gold.