As gold has steadily climbed this year, the one headwind appearing to restrain the precious metal near the $1,500 an ounce level has been the U.S. dollar. In international markets, gold is priced in U.S. dollars, making the precious metal relatively expensive for overseas buyers when the dollar is strong because they must spend more of their local currency to purchase gold. In October, the U.S. dollar suffered a slight setback, which some analysts think could be the start of a long-term trend. The Wall Street Journal U.S. Dollar Index dipped two percentage points through late October, as the Euro rallied against the greenback.
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Among the factors pushing the dollar lower are accumulating signs of a weakening domestic economy, particularly in manufacturing, and anticipation of further interest rate declines. Wall Street is highly confident the Federal Reserve’s Open Market Committee will lower its Fed Funds rate for the third time this year at the October 30 policy meeting, which would drive down the cost of overnight bank borrowing to between 1.5-1.75 percent. A drop in U.S. interest rates would narrow the differential with European rates and tend to discourage the exchange of foreign currencies into dollars for investment purposes.
J.P. Morgan Asset Management has told clients the U.S. dollar is overvalued and should gradually decline in the coming years. Invesco is also forecasting a weaker dollar. Dollar weakness and the outlook for lower interest rates has sparked hedge fund interest in gold, according to French bank Société Générale. The bank’s global head of asset allocation recently recommended investors purchase gold for its safe haven status.
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