The US dollar has suffered its biggest one-week decline this year, pushing gold higher

The US dollar had its biggest weekly decline in 2022. The dollar index opened at roughly 111,034 on Monday and as of 3:23 PM EST is currently settled at 106,275. In just one week, the US dollar index has lost 4.824 points, which is a 4.286% decline.

In the same week, the most active December 2022 contract in the underlying gold futures opened at $1,678.40 and as of 3:23 p.m. EST is now settled at $1,769.80, a net gain of $91.40 or Net profit of 5.445%.

This means that dollar weakness this week accounted for 78.15% of the gains seen in gold, with the remaining 21.285% attributable directly to market participants pushing the precious metal higher. In other words, dollar weakness was the driver of gold’s recent rally and accounted for about 4/5 of the gains in gold futures this week.

What caused the US dollar to fall so much this week?

The dollar index was created in 1973 to measure the value of the US dollar against other major world currencies. The dollar index is weighted against a basket of six foreign currencies, with different weights given to each currency. The six currencies used to evaluate the value of the dollar index are; Euro – 58%, Japanese Yen – 14%, British Pound – 12%, Canadian Dollar – 9%, Swedish Krona – 4%, and Swiss Franc – 4% by weight.

One component that drives changes in the value of the US dollar is the yield on the purchase of US Treasuries. The US dollar is very sensitive to yields on US debt instruments such as the 30-year Treasury note or the 10-year note. As yields on U.S. bonds rise, it attracts foreign investment in high-yielding fixed assets, which demand the purchase of dollars, thereby increasing the value of the dollar index. When yields on U.S. bonds and notes fall in tandem, the opposite effect occurs as the dollar loses value, as foreign investors shift their investments from U.S. debt instruments to other fixed assets that offer good yields.

This week the BLS reported that the CPI index for October increased by only 7.7% year-over-year. This was the lowest value of the consumer price index since January of this year, when the CPI stood at 7.5%. The chart above is from Cpiinflationcalculator.com and it clearly shows that October’s inflation rate was one of three months this year that was below 8%. The average annual inflation rate for 2022 is currently 8.38% year-on-year.

Inflation in January 2022 was 7.5 years. Inflation was expected to rise to 8.5% year-on-year in March when the Federal Reserve stepped in and began its first interest rate hike since 2018 by 25 basis points. However, inflation continued to rise and in June it increased by 9.1% year-on-year. From July to August, inflation as measured by the consumer price index fell gradually.

In the last week of September, the dollar index reached its highest value this year at approximately 114,793. Since then, the dollar has lost tremendous value as market sentiment began to shift to expectations that the Federal Reserve would slow down its aggressive rate hikes, which were now having the effect of bringing down inflation.

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