Financial Sharing

The relationship between us dollar and gold

June 17, 2020

The impact of the US dollar on the gold market has two main aspects. One is that the US dollar is the marked currency in the international gold market, so it has a negative correlation with the gold price. Assuming that the gold price itself has not changed, the US dollar will fall, On the other hand, gold is an alternative investment tool for us dollar assets. In fact, in the years before 2005, the price of gold kept rising, and one of the main factors was the sharp decline of US dollar for three consecutive years.

According to the statistics of historical data in the past 30 years, the negative correlation between us dollar and gold is about 80%, while the relationship between us dollar and gold is more and more close to – 1% in the past decade. Therefore, when we analyze the trend of gold price, the change of US dollar exchange rate is an important reference.

Generally, the tool for us to analyze the trend of the US dollar is the US dollar index, which is a comprehensive indicator reflecting the exchange rate of the US dollar in the international foreign exchange market, and is used to measure the exchange rate change of the US dollar against a package of currencies. It measures the strength of the U.S. dollar by calculating the comprehensive rate of change of the U.S. dollar and the selected basket of currencies, thus indirectly reflecting the change of the U.S. export competitiveness and import cost. If the dollar index falls, it means that the dollar depreciates against other major currencies. The calculation principle of US dollar index futures is to calculate the overall strength of the US dollar in a weighted way based on the trade settlement volume between major countries in the world and the United States, with 100 as the strength boundary. After the introduction of the euro on January 1, 1999, the subject matter of the futures contract was adjusted from ten countries to six countries. The euro also became the most important currency with the largest weight, accounting for 57.6%. Therefore, the fluctuation of the euro has the greatest impact on the strength of the dollar index.

The US dollar index (USDX) is calculated by referring to the geometric average weighted value of the exchange rate changes of six currencies against the US dollar in March 1973. Its value is measured on the basis of 100.00. The 105.50 offer refers to a 5.50% increase in value since March 1973.

March 1973 was chosen as the reference point because it was a historic turning point in the foreign exchange market. Since then, the major trading countries have allowed their currencies to float freely with the currencies of other countries. The agreement, reached at the Smithsonian Institution in Washington, symbolizes the triumph of free trade theorists. The Smithsonian agreement replaced the unsuccessful fixed exchange rate regime reached at Breton Woods in New Hampshire about 25 years ago.

The current USDX level reflects the average value of the US dollar relative to the 1973 benchmark. So far, the U.S. dollar index has risen to 165 points, or below 80. This change characteristic is widely compared with futures stock index in quantity and change rate.

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