The U.S. dollar index now seems to have the best week since early April, gaining about 1.5% on a weekly basis. The dollar may be supported by the growing uncertainty surrounding the new stimulus package for the American economy and concerns about the return of restrictions in Europe due to the growing number of infections and new COVID-19 records in France or the UK.
The UK and France have reported the highest number of cases since the beginning of the pandemic. The UK government presented a plan to save millions of jobs and businesses, while France took new steps to combat the rapid return of the epidemic. Other European countries may also be heading in this direction, which may stop the holiday rebound in the economy, and thus also stop the previous boom on the stock exchanges.
The fate of the stock market bulls seems to depend on politicians, and they still cannot agree on a new plan to support the world's largest economy. On Friday, investors may consider the prospects of the $2.4 trillion stimulus package proposed by the American Democrats in the House of Representatives. However, the bill is much bigger than what the Republicans in the Senate said they would accept, Bloomberg said. As a result, there is again a growing uncertainty as to whether the package can be voted through.
While the dollar seems to be the biggest winner this week, the biggest losers may be silver, which has declined by about 14 percent. Gold, in turn, has dropped by about 5 percent. On the one hand, the strong dollar, and on the other hand, the reduction of negative real interest rates in the United States and the worsening of economic growth prospects may have influenced the corrective moves. Nevertheless, in the long run, it seems that the negative real interest rates in the US will be growing and heading towards -2 percent, which may be helpful for the return of gold to the upward trend.
Today we also get a speech from François Villeroy de Galhau, Governor of the Bank of France, who said that the European Central Bank may allow inflation to exceed 2% for some time. This could mean a change in relation to what the ECB always says in its announcements that inflation is to be close but below 2%. So this is a statement that could suggest a turn in the direction taken by the Fed. In other words, the struggle for where there will be more negative real interest rates in the future.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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