The Dollar gains as Gold rises following the Fed Statement

Gold prices saw a rise as the dollar gained against it rivals on Wednesday following the monetary policy update by the Federal Reserve. This was after the previous hike owing to improved GDP. Central bank issued a statement that interest rates will remain unchanged in the range of 1%-2%. However, the bank indicated a possibility that interest rates might be increased in the December meeting.

Bank of England’s meeting to be held on Thursday is expected to raise the benchmark rate by 0.5% from 0.25%. Being the first interest rate increase in over 10 years, economists are keen to see how the increase will affect currencies, particularly gold and the dollar.

In October, Gold saw a 1.1% decrease in value. The October value decline has been linked to the bigger than expected decline in the US manufacturing index after 13 years of being stable. The fall in the ISM manufacturing index has been linked to Hurricanes Harvey and Maria. Economists are hopeful that the deep is temporary and that the manufacturing index will rise in November. A nonfarm payrolls report to be made on Friday is expected to further shed light on Gold and Dollar rise. Other metals including platinum, copper and silver have seen a boost in value throughout the year.

While the ICE US Dollar Index rose at a 0.3% against its rivals at 94.788, the WSJ US Dollar Index also grew stronger by 0.2% to reach 87.76. The dollar recorded a 0.1963% gain against the pound. On Wednesday the Pound bought at $1.3250 rising from $1.3283 on Tuesday. The Euro traded at $1.1618 on Wednesday from $1.1648 on Tuesday recording a 0.2840% gain. In the emerging markets, the Dollar strengthened against the Turkish Lira to buy at 3.8165 on Wednesday compared to 3.7920 on Tuesday. Turkish Central Bank has warned of a potential inflation in November.

Other factors expected to affect the dollar value in the short run are the Republican led tax bill and the appointment of the new Central Bank chairman by Donald Trump. The republican led bill will call for a drop in corporate tax to 20% and advocate for planned repeal of estate tax. A decline in payroll date could lead to rate increase in 2018.

Changes in the federal funds rates affects the U.S Dollar. Increase in federal rate lead to increase in interest rates. The effects of higher interest rates are such that the cost of storing commodities increases resulting to a decrease in investor returns. This reduces spending causing a decrease in inflation therefore boosting the dollar. The dollar also strengthens when the average wages increase and as a result of increase in overall consumption.

Although there is no direct correlation between Gold prices and interest rates, increase in interest rates may lead to decline in stock market prices causing investor to look for other investment alternatives such as gold. Consequently, the demand for gold increases leading to a boost in its value.

The US has come a long way in recovering from the 2008 economic recess. The Dollar has remained stable for the most part as the value of gold rose steadily over the last decade. Economists are on the look out to see how the two currencies perform in the next few months.