In times of trouble, investors look for safe havens, and amid the war in Ukraine, those havens include gold and the dollar.
That’s something of an irony, given that the two assets often move in opposite directions. But not now.
The Bloomberg Dollar Index, which measures the greenback’s strength against 10 major currencies, on Monday touched its highest level since July 2020. And gold surpassed $2,000 an ounce Monday, reaching its highest point since August 2020, before slipping back to $1,993 in recent trading, still up 1.15% from Friday.
A Beacon During Turmoil
As the world’s primary reserve currency, the dollar represents a beacon during periods of geopolitical turmoil. It’s also used to purchase gold and U.S. Treasury securities, which constitute another safe-haven asset. So that increases demand for the currency.
In addition, the war in Ukraine is expected to hurt Europe’s economy more than that of the U.S., as Europe has closer economic ties to Russia than the U.S. does.
Last year, Russia was the European Union’s fifth largest export market and third largest provider of imports, according to Eurostat. Meanwhile, Russia was only the 23rd biggest trade partner for the U.S. last year, according to the Census Bureau.
Also, there’s a good chance the war will send inflation soaring, as it has caused a jump in commodity prices such as oil, which on Monday hit a 13-year high. The U.S. crude price breached $130 a barrel Monday before sliding back to $120.53 in recent trading. That’s still up 4.2% from Friday.
Rising inflation could make the Federal Reserve more aggressive in raising interest rates to quell inflation. And higher rates could help the dollar by making the yields of U.S. fixed-income assets more attractive.
Dollar Still the Reserve Choice
Talk has arisen in recent years that the dollar will lose its position as the world’s main reserve currency. But for now, it’s standing tall. But Europe’s economic foundation doesn’t seem strong enough for the euro to take over. And the fact that China hasn’t let the yuan trade freely limits its chances of being the No. 1 reserve currency.
As for gold, it is seen as a hedge against inflation. So the inflationary pressure of the war could benefit the metal.
The impact of higher commodity prices also could hurt U.S. economic growth by limiting demand. Slow growth can lift gold’s appeal by lessening the attractiveness of competing assets, such as U.S. stocks, that carry at least a fair amount of risk.
Bond yields have dropped during Russia’s invasion of Ukraine, making gold, which pays no interest, look more attractive compared to fixed-income investments.
In evidence of strong investor demand for gold, gold exchange-traded funds saw inflows last week that pushed their assets to the highest level in almost a year, Bloomberg reports. And the net-long gold position of hedge funds trading on the Comex have hit the highest level since August 2020.