by The US Dollar just had its biggest weekly drop in 2022. On Monday, the Dollar Index opened at around 111.034 and as of 3:23 PM EST is currently firm and closed at 106.275. In one week, the US dollar index fell 4.824 points, which is a decrease of -4.286%.
Based on gold futures for the same week, the most active December 2022 contract opened at $1678.40 and at 15:23 EST is currently flat at $1769.80, a net gain of $91.40 or a net gain of +5.445%.
This means that dollar weakness this week accounted for 78.15% of gold’s gains, with the remaining 21.285% attributable directly to market participants bidding higher for the precious metal. In other words, dollar weakness was the driving force behind gold’s recent rally, accounting for about 4/5 of gold futures’ realized gains this week.
What caused the US dollar to fall so much this week
The dollar index was created in 1973 to estimate the value of the US dollar relative to other major world currencies. The dollar index is weighted against a basket of six foreign currencies, and each currency is given different weights. The six foreign currencies used in evaluating 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 factor driving changes in the value of the US dollar is the return on the purchase of US government bonds. The US dollar is highly sensitive to yields on US debt instruments, such as Treasuries such as the 30-year Treasury note or the 10-year Treasury note. As the yield on US bonds and notes rises, it attracts foreign investment in those fixed assets with favorable returns, requiring the purchase of dollars, which increases the value of the dollar index. Conversely, when U.S. Treasury yields fall, it creates the opposite side as the dollar loses value as foreign investors shift their investments in U.S. debt instruments to other commodities that offer lower yields.
This week, the BLS reported that the October CPI rose just 7.7% year-over-year. This was the lowest value of the consumer price index since January of this year, when the consumer price index was 7.5%. The chart above is from Cpiinflationcalculator.com and clearly shows that October’s inflation rate was one of three months this year that fell below 8%. The average annual inflation in 2022 is currently 8.38 percent compared to a year ago.
In January 2022, inflation was 7.5 at the annual level. Inflation would rise to 8.5% year-on-year in March when the Federal Reserve stepped in and began its first 25 basis point rate hike since 2018. However, inflation continued to accelerate, peaking at 9.1% year-on-year in June. In July-August, inflation measured by the consumer price index slowed down slowly.
In the last week of September, the dollar index reached its highest value this year, at around 114.793. Since then, the dollar has lost a huge amount of value as market sentiment began to shift to the assumption that the Federal Reserve would slow down its aggressive rate hikes now that they were lowering inflation.
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