Commodities
What will the US elections bring for the US dollar and gold prices?
Investing.com — As the U.S. elections on November 5 approach, financial markets are keenly attuned to any shifts in economic policies that might affect the dollar and prices. If one party wins the presidential election, varying scenarios are likely to unfold regarding these key assets.
“The US dollar has a dual character meaning it has a cyclical nature, while also being the ultimate safe haven currency,” said an economist at ABN AMRO (AS:) Bank in a note.
This duality means that in times of strong economic growth—particularly when growth outpaces inflation, real interest rates are positive, and fiscal and current account balances are improving—the dollar tends to rally.
However, in periods of extreme market stress and liquidity shortages, the dollar’s role as a safe haven becomes paramount, driving its value up as investors seek stability.
A Democratic victory in the upcoming election, whether partial or full, is expected to have a limited impact on the U.S. dollar. As per ABN AMRO Bank, under a Democratic administration, inflation is likely to decrease, but policy rates may decline even faster, leading to a reduction in real rates, which is typically negative for a currency.
While a slight deterioration in the fiscal balance might exert some downward pressure on the dollar, the overall impact is anticipated to be modest, resulting in a relatively stable dollar with only minor fluctuations.
In contrast, a Republican victory could lead to increased volatility for the U.S. dollar. At first, the dollar may experience a boost, fueled by expectations of stricter trade policies, such as the introduction of tariffs, which could enhance the trade balance.
The combination of rising inflation and faster interest rate hikes compared to other nations would further support the dollar’s strength.
However, this initial surge is likely to be temporary. As the broader economic impacts of these policies become apparent, the dollar could see a decline over the longer term.
In a scenario where a Republican administration implements widespread tariffs—a “Hard Trump” scenario—the resulting divergence between U.S. and European monetary policies could be among the most pronounced since the euro’s launch in 1999.
This scenario could result in a depreciation of the euro relative to the dollar, potentially driving the exchange rate below parity.
However, as market sentiment stabilizes and the negative consequences of these policies begin to impact the economy, the initial strength of the dollar could reverse, leading to a phase of marked dollar weakness.
Turning to gold, this precious metal has traditionally been viewed as a safe haven, especially during times of economic uncertainty.
However, the dynamics of the gold market have evolved in recent years, particularly with the rise of gold ETFs, which have made gold more of a speculative asset, heavily influenced by investment flows, U.S. dollar movements, and real interest rates, rather than merely by its traditional role as a safe haven.
If the Democrats win, “we think the gold prices could be very modestly supported because we expect a modest decline in or a neutral dollar and some lower real yields. We expect gold prices to stay around USD 2,500 per ounce,” said an economist at ABN AMRO Bank.
Conversely, a Republican victory, particularly one that leads to the implementation of widespread tariffs, could create a more complicated scenario for gold.
In the early years of such an administration, rising inflation and increasing interest rates could bolster the dollar, potentially driving gold prices below their 200-day moving average, possibly down to $2,000 per ounce.
However, as the dollar’s initial strength fades and real interest rates decrease, gold is likely to rebound, with prices potentially exceeding the highs reached earlier in 2024.
By Paul Carsten
(Reuters) – Oil prices rose on Thursday after a large interest rate cut from the U.S. Federal Reserve, but Brent was still hovering around its lowest levels of the year, below $75, on expectations of weaker global demand.
futures for November were up 66 cents, or 0.9%, to $74.31 a barrel at 1156 GMT, while WTI crude futures for October were up 58 cents, or 0.8%, to $71.49 a barrel. The benchmarks had earlier risen more than $1 each.
The U.S. central bank cut interest rates by half a percentage point on Wednesday. Interest rate cuts typically boost economic activity and energy demand, but the market also saw it as a sign of a weaker U.S. labor market that could slow the economy.
“While the 50 basis point cut hints at harsh economic headwinds ahead, bearish investors were left unsatisfied after the Fed raised the medium-term outlook for rates,” ANZ analysts said in a note.
The Bank of England on Thursday held interest rates at 5.0%.
Weak demand from China’s slowing economy continued to weigh on oil prices.
Refinery output in China slowed for a fifth month in August, statistics bureau data showed over the weekend. China’s industrial output growth also slowed to a five-month low last month, and retail sales and new home prices weakened further.
Markets were also keeping an eye on events in the Middle East after walkie-talkies used by Lebanese armed group Hezbollah exploded on Wednesday following similar explosions of pagers the previous day.
Security sources said Israeli spy agency Mossad was responsible, but Israeli officials did not comment on the attacks.
Citi analysts say they expect a counter-seasonal oil market deficit of around 0.4 million barrels per day (bpd) to support Brent crude prices in the $70 to $75 a barrel range during the next quarter, but that would be temporary.
“As 2025 global oil balances deteriorate in most scenarios, we still anticipate renewed price weakness in 2025 with Brent on a path to $60/barrel,” Citi said in a note on Thursday.
Investing.com — Brent crude oil prices could be bolstered in the near-term by demand possibly outstripping supply in the fourth quarter, according to analysts at Citi.
A reported decision by the Organization of the Petroleum Exporting Countries and its allies to delay the beginning of a tapering in voluntary output cuts, along with ongoing supply losses in Libya, is predicted to contribute to a oil market deficit of around 0.4 million barrels per day in the final three months of 2024, the Citi analysts said.
They added that such a trend could offer some temporary support to “in the $70 to $75 per barrel range.”
Meanwhile, the benchmark could be further boosted by a potential rebound in recently tepid demand from top oil importer China, the analysts said.
But they flagged that they still anticipate “renewed price weakness” in 2025, with Brent on a path to $60 per barrel due to an impending surplus of one million barrels per day.
On Thursday, crude prices were higher after a super-sized interest rate cut from the US Federal Reserve elicited a mixed reaction from traders, while worries over global demand also lingered.
By 03:30 ET, the Brent contract gained 0.9% to $74.34 per barrel, while futures (WTI) traded 1.0% higher at $70.58 per barrel. The benchmarks had recovered after slipping in Asian trading, with Brent in particular hovering near its lowest mark of the year.
The Fed slashed interest rates by 50 basis points on Wednesday and indicated that it would announce further cuts this year, as the central bank kicks off an easing cycle to shore up the economy following a prolonged battle against surging inflation.
Lower rates usually bode well for economic activity, but the Fed’s aggressive cut also sparked some concerns over a potential slowdown in broader growth.
While Fed Chair Jerome Powell moved to soothe some of these fears, he also said that the Fed had no intention of returning to an era of ultra-low interest rates, and that the central bank’s neutral rate was likely to be much higher than seen in the past.
His comments indicated that while interest rates will fall in the near-term, the Fed was likely to keep rates higher in the medium-to-long term.
Meanwhile, US government data released on Wednesday showed a bigger-than-expected, 1.63 million barrel draw in inventories, which analysts at Citi said was due to lower net imports and domestic production “outpacing” a drop of crude oil consumed by refineries.
“US crude output was hit by Hurricane Francine, with a peak of 732,000 [barrels per day] of offshore Gulf of Mexico oil output shut-in […], with the tail end of the impact reaching until Tues[day] Sept. 17, which should still show up in next week’s data,” the Citi analysts said in a note to clients.
While the fall was much bigger than expectations for a decrease of 0.2 mb, it was also accompanied by builds in distillates and gasoline inventories. The increses in product inventories added to worries that U.S. fuel demand was cooling as the travel-heavy summer season wound to a close.
Investing.com– Gold prices moved in a flat-to-low range in Asian trade on Thursday, and were nursing overnight losses after less dovish signals from the Federal Reserve offset some optimism over a bumper rate cut.
Strength in the pressured bullion prices, as the greenback rose sharply on bets that U.S. interest rates may not fall as much as expected in the medium to long term.
The yellow metal also saw some profit-taking after hitting record highs in the run-up to Wednesday’s Fed decision.
rose 0.1% to $2,561.30 an ounce, while expiring in December fell 0.5% to $2,585.65 an ounce by 00:24 ET (04:24 GMT). Spot prices were nursing some overnight losses, and pulled back further from recent record highs.
Fed cuts rates by 50 bps, but offers less dovish outlook
The Fed by 50 basis points- the upper end of market expectations- in its first rate cut since the COVID-19 pandemic in 2020. The central bank also announced the beginning of an easing cycle.
Fed Chair Jerome Powell quelled some concerns over a slowing economy after the outsized rate cut, stating that risks between rising inflation and a softer labor market were evenly balanced. Powell flagged the prospect of more rate cuts, with markets pricing in a total of 125 bps worth of rate cuts by the year-end.
But Powell also said the Fed had no intention of returning to an ultra-low rate environment as seen during COVID-19, and said the Fed’s neutral rate will be much higher than seen previously.
His comments presented a higher outlook for rates in the medium-to-long term, and somewhat diminished optimism over Wednesday’s cut.
Still, the prospect of lower rates bodes well for non-yielding assets such as gold, given that it decreases the opportunity cost of investing in bullion.
Other precious metals rose on Thursday, but were also nursing overnight losses. rose 0.5% to $978.15 an ounce, while rose 0.2% to $30.755 an ounce.
Copper prices rise, China rate decision awaited
Among industrial metals, copper prices advanced on Thursday amid expectations of more stimulus measures from top importer China, with an interest rate decision from the country due on Friday.
Benchmark on the London Metal Exchange rose 0.4% to $9,425.50 a ton, while one-month rose 0.6% to $4.2970 a pound.
The People’s Bank of China is widely expected to keep its benchmark unchanged on Friday. But persistent signs of economic weakness in the country are expected to eventually spur further cuts in the LPR.
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