The Bulletproof Greenback
Once again, as long as the Fed keeps on lifting rates and positive rate differentials continue to attract foreign inflows into U.S. assets, the dollar will remain supported, Powell says.
The underlying threat stemming from the ever-rising current account deficit, however, may explain why gold has continued to rally even with current dollar strength and tame headline inflation. In recent action, gold was up 1.1% to $504.70 per ounce, on track for its highest close since 1987.
As explained by Peter Grandich here, gold may still be benefiting from a short-squeeze but also from investors' need to hold on to hard assets amid uncertainty about the underpinnings of the U.S. dollar.
Long-term U.S. Treasuries, meanwhile, have continued to benefit from foreign inflows. But on Thursday, the benchmark 10-year Treasury bond was falling 11/32, while its yield rose to 4.53%. The weakness followed the strong ISM report and as the market positioned itself for what's expected to be a strong November jobs report on Friday.The rise in the yield of the 10-year bond slightly eased concerns that the yield curve, which plots the yields of short-term to long-term bonds, will invert, usually a precursor of economic recessions. According to Michael Gregory, bond strategist at BMO Nesbitt Burns, there are currently two camps fighting each other in the bond market. "On the one hand, those that believe that external financing of the current account deficit remain a risk are pushing yields higher," he says. On the other hand, "there are those that [think] the deficit remains well funded and that the Fed will go too far next year," meaning growth will at least slow. "My take is that the two will balance out each other and we'll end with a flattish curve," Gregory says.
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