Unveiling the Strength: Analyzing the Current Trend of the US Dollar

The US dollar is currently experiencing a surge in popularity, presenting both risks and opportunities for investors. One way to track the value of the dollar is through the U.S. Dollar Index (USDX), an exchange-traded fund that measures its strength against a basket of six major foreign currencies.

How Strong Is the Dollar?

The US Dollar Index compares the dollar’s value to the euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF). As of May 17, here is how the dollar stands against these currencies:

EUR/USD: One euro is equivalent to $1.09, down from $1.10 on May 4, 2023.

USD/JPY: One dollar is equivalent to 136.36 yen, up from 134.27 yen on May 4, 2023.

USD/CHF: One dollar is equivalent to 0.89 Swiss francs, up from 0.88 francs on May 4, 2023.

GBP/USD: One British pound is equivalent to $1.24, down from $1.25 on May 4, 2023.

USD/CAD: One dollar is equivalent to C$1.35, with minor fluctuations since May 4, 2023.

Over the past 2 weeks, the US dollar has generally gained strength against most major currencies.

Looking forward, the strength of the dollar will likely be closely tied to US inflation and interest rates, according to Quincy Krosby, LPL Financial’s chief global strategist.

Debt ceiling stalemate

However, recent concerns about the US debt ceiling have impacted the dollar’s performance. Safe-haven demand due to a slowing Chinese COVID recovery and an unexpected rise in US consumer inflation expectations boosted the dollar last week. Yet, the focus has shifted to the looming borrowing limit, which Treasury Secretary Janet Yellen has warned could be reached as early as June 1. Investors are eagerly awaiting news from Washington on how the debt ceiling issue will be addressed, as failure to resolve it could lead to a US government debt default.

Emerging markets

Meanwhile, in emerging markets, the Turkish lira has seen a significant decline, nearing a record low, as weekend elections appear headed for a runoff. On the other hand, the Thai baht has rallied following a more decisive election result.

In conclusion, the US dollar’s current trend is marked by its strength against major currencies, influenced by factors such as inflation, interest rates, and the looming debt ceiling issue. Monitoring these developments is crucial for investors as they assess the risks and opportunities presented by the US dollar’s performance.

An Introduction to Stock Market Indices

When you check market news, you notice how prominently information about indices figures in any market update. Before you are briefed about the prices of individual companies’ shares, you hear about the movement of major indices. As of writing, for example, indices are on the rebound, spurred by a reversal in the bank selloff. After a slide, the S&P 500 snapped back and celebrated its second straight week of gains. The NASDAQ 100 edged 0.3% higher, while the FTSE is above its recent lows, brought up by the BoE’s 25 basis point rate hike.

The questions are what this information means and why it is crucial for the markets and the global economy. However, before we try to answer them, the explanation of what indices are is in order.

What Are Indices?

A stock market index measures a section of the stock market. It tracks the performance of a specific group of stocks, bonds, or other investments. These stocks, bonds, or investments are often grouped around a particular industry, such as the tech, pharmaceutical, or automobile industries. The NASDAQ is tech-heavy, and when major tech companies listed on it take a plunge, it slips, too.

Often, these industries are gathered around the stock market overall, as is the case with the S&P 500 and the Dow Jones Industrial Average. Indices are not equal in size: the Dow Jones features only 30 stocks; the FTSE 100 consists of the largest 100 qualifying UK companies, while the CRSP index contains more than 3,700 stocks. But all indices do include a sufficiently large sample size of companies to represent the overall behavior of the economic section.

How Are Indices Constructed?

How do the indices choose companies or other instruments to include? Or put differently, what criteria should companies satisfy to qualify for inclusion? There is no single propriety formula embraced by all existing indices.  Each stock market index chooses its standards to put companies on its list.  

Some indices include only those companies that rank highly in terms of market capitalization or in terms of the total value of all their outstanding shares. In this case, large companies have a more substantial impact on the index’s performance. Tesla, listed on the NASDAQ, had a market cap of $602.47 billion in March 2023. If the price of its stock sinks, it will pull the index deeper down than will the dropping Ericsson, whose market capitalization is now $189.16 billion.

Indices also differently determine how included companies are represented; that is, they assign a different weight to them. Depending on weighing, all companies listed on an index can have an equal impact on index performance or a different impact. This impact is based on market capitalization or share value.

If an index assigns an equal value to all included companies, they will affect its performance with an equal force, regardless of their price, size, or market value. The S&P500 Equal Weight Index (EWI) is the equal-weight version of the S&P 500. Each company in the S&P EWI is allocated a fixed weight or 0.2% of the index total at each quarterly rebalance. On this index, companies influence its performance in an equal measure, whether they are large or small.

Stock market indices can also be price-weighted. Such indices give each company a different weight, depending on the current price of its share. Companies with larger share prices have more influence on an index’s overall direction, regardless of their size. The most popular price-weighted stocks are the Dow Jones Industrial Average (DJIA) and the Nikkei 225. Microsoft, included in the Dow Jones, will move the index more than Intel Corporation, also listed there, because its current price is $280.96, much higher than Intel’s $29.39.

Why Are Indices Important?

If you want to understand the state of a country’s equity market, look no further than its indices. Indices and their movements provide insights into the economy, investors’ risk appetite, and the trends for investing. Studying stock market indices will help you make intelligent investment decisions. You should also analyze indices to manage your portfolio smartly. Indices are deeply integrated into the business of investment management. Funds use indices as benchmarks to make comparisons between companies’ performances.

How to Invest in Indices?

Indices measure the performance of a group of companies and investments. Therefore, funds based on leading indices are a recommended way to invest quickly, efficiently, and potentially profitably. Index funds and ETFs give access to a diversified portfolio of stocks and bonds and might be an excellent investment for trading novices and experienced investors. Investing in index funds and exchange-traded funds can be done with any amount of money and with any brokerage. If you want to try to put your money in indices, talk to Xtrade’s experts. They will ensure that your investment in indices brings profits.

Investing in the Base Metal Market: What You Need to Know

People readily invest in gold, considering it a shelter in difficult economic times. Silver is popular, too, because, like gold, it holds its value better than other assets during inflation. Yet gold and silver are not the only profitable metals you can trade. If you are interested in trading commodities, especially natural resource commodities, you can put your money in base metals. Although not as expensive as gold and silver, base metals – copper, nickel, zinc, lead, and iron – serve numerous commercial and industrial purposes and may bring you lucrative profits.

What Are Base Metals?

The concept of “base metals” may sound derogatory, especially alongside the term “precious metals.” Compared to the precious and rarer metals gold, silver, and platinum, base metals are more commonly found in the depths of the earth. They are also much easier to mine than precious metals, so they are rated less expensive for manufacturing. However, base metals are not worthless even if they lose compared to gold, silver, and platinum. They are invaluable to the global economy because of their utility and ubiquity.

Indeed, base metals are employed in many commercial and industrial spheres for numerous purposes. Think of copper plumbing, aluminum cans, and the steel necessary for manufacturing vehicles. Nearly ubiquitous and easily mined, base metals cost far less than their precious and rare earth peers. As of writing, the gold spot is trading at $1,817.25 per ounce; platinum’s price is $959.21 per ounce. Copper is up to $402.35. The prices of base metals respond to changes in demand for the products for which the metals are used.

Copper has an additional function lacking by other base metals. Investors look to copper prices to understand how healthy the global economy is because it is widely used in construction. Its prices are used as a significant indicator of global economic growth. Analysts say that if demand for copper is increasing and prices are surging, the global economy might be improving. A decline in the price of copper may alert investors to a slowdown in the economy or, at least, prompt the thought that economic activity is slowing down in essential areas of the economy.

How to Invest in Base Metals?

If you consider investing in base metals, you can participate in the base metals market in several ways.  You can invest in individual companies that specialize in base metals production. Statista provides a list of the major base metal-producing companies worldwide, which you may address when deciding where to put your money. For instance, you may invest in GlencoreXstrata, producing copper, nickel, zinc, tin, lead, and cobalt; or Freeport – McMoRan, dealing with cooper; or BHP Billiton, participating in the production of copper and nickel.  RioTinto, producing copper, is also a good choice, as are Norilsk Nickel specializing in nickel and copper, steel company US Steel, and aluminum company Alcoa. In addition to investing in individual companies, you may try your hand at trading futures and options contracts of individual metals. Go to CME Globex, a trading system providing global connectivity to the broadest arsenal of futures and options across all asset classes, and trade copper futures (HG) and options (HX).

Another variant is to turn to base metal exchange-traded funds (EFTs) found in a wide variety worldwide. You may make a deal at the Invesco DB Base Metal Fund, comprising futures contracts on zinc, copper, and aluminum. Or you may contact the SPDR S&P Metals & Mining ETF, which consists of companies involved in the mining and metals industries. There is also the iShares US Basic Materials ETF, including companies producing basic materials.  

How to Invest in Copper?

Copper enjoys popularity and is known to people more than other base metals because of its wide range of applications. Copper is used in wiring, plumbing, electronics, and coinage. This base metal is referred to as an indicator of the health of the global economy. As the economy worldwide has lately been unstable, the price of copper has experienced highs and lows, swayed by trade tensions between China and America, supply shortages, and the war between Russia and Ukraine. As the pandemic began to subside, copper jumped to an all-time high of above $10,700 per tonne. As copper might experience a supply deficit, Goldman Sachs predicts its prices will soar to $9,750 in 2023, with the average price climbing to $12,000 by 2024. There are reasons to expect copper to beat its all-time high record next year.

You may invest in copper as you invest in other base metals. Choose either copper futures or copper exchange-traded funds (ETFs), or copper stocks. Many major miners deal with copper: Codelco, Glencore, PHP Group, Freeport – McMoRan, Grupo Mexico, Teck Resources, Southern Copper, Rio Tinto, and Antofagasta.  There is also a rich arsenal of smaller companies engaged in copper production, including ATEX Resources, Barksdale Resources, NGEx Minerals, Los Andes Copper, and Amarc Resources.

Base metals might be cheaper than their precious peers and are not deemed a safe haven in troublesome economic times. But they are indispensable in many industries and often boast unique properties absent in other metals. Nickel is the major component of stainless steel, whereas zinc is included in galvanizing steel as a protection against corrosion. Copper goes into wiring and coinage. These unique qualities, together with their comparatively low prices, recommend base metals as investment assets.

Why Demand and Supply Don’t Determine Oil Prices?

Oil prices make daily headlines, and oil continues to influence the global economy, often indicating its general health. WTI’s high price now – above $78 a barrel – gives evidence of the geopolitical instability in the world, which began a year ago when the eruption of the Russian-Ukrainian war pushed oil prices to almost $140, a nearly 14-year high. Yet low oil prices do not always bespeak the blossoming of the global economy either. When the world experienced the financial crisis and the onset of the Great Recession in 2008, oil crashed to an all-time low of $41.64 a barrel. If oil plunges as definitely as it soars in times of political and economic turmoil, are there other factors affecting its prices more unambiguously?  

There are other drivers of oil prices – supply and demand in the market, the cost of extracting and producing oil, decisions of the countries belonging to OPEC, and investors’ sentiments. Yet none of these factors determines the price of oil with precision. Oil can always surprise the world, regardless of the influence of these traditional forces.

Take the supply and demand factor. You would think that the supply and demand ratio directly impacts the price of oil. Economists call this a Demand Law. They say when demand increases or supply decreases, the cost of goods climbs. Alternatively, when demand decreases or supply increases, their price slides. A retail price of an ice cream affords a telling example.

Statista shows that the 2023 price for ½ gallon of ice cream in the USA is $5.56. Suppose you can allow yourself a gallon of ice cream per day at this price. If retailers agree to sell ½ gallon of ice cream for $6.56, you will probably limit yourself to half a gallon. However, if they start selling ice creams at the 2006 price of $3.90, you might eat one and a half gallons daily. Although the Law of Demand makes sense concerning ice creams, it does not work as clearly with oil prices.

The problem is that the oil price is set in the oil futures market. A futures market is an auction market where market participants buy and sell commodities and futures contracts for delivery on a specified future day. An oil futures contract is a binding agreement that gives investors the right to buy oil by the barrel at a predefined price on a predefined date in the future. After sellers and buyers sign their oil futures contract, they must fulfill their side of the transaction on the date specified in the contract. Oil traders fall into two categories – hedgers and speculators – and have the power to influence oil prices regardless of oil supply or demand when they trade.

Indeed, large financial institutions, hedge funds, pension funds, and other investment funds tend to pour billions of dollars into the energy commodities market. Research shows that over the past few years, they have invested as much as $60 billion into the US oil futures market to capitalize on the oil price changes or hedge against them. Much of this additional investment has come from investment funds that do not use oil as part of their business. They are, therefore, involved in speculation, according to the Commodity Futures Trading Commission (CFTC).

Speculators do not produce or use oil but risk their capital trading futures in oil to profit from price changes. Reports indicate that some speculators have earned hundreds of millions of dollars in profits in the past couple of years by trading oil futures. Their affluence is, however, only a part of the problem. The large purchases of crude oil futures contracts by speculators have created an additional oil demand, driving its price higher. As far as the energy commodity market is concerned, the demand for a barrel of oil that stems from a speculator’s purchase of a futures contract is as actual as the demand for a barrel resulting from purchasing a futures contract by a refiner or user of petroleum. As speculators can artificially manipulate oil demand, neither demand nor supply influences oil prices fairly and predictably. The demand and supply factor reflects rather people’s greed and craftiness than the actual need for oil in the world.

The forces of supply and demand cannot fully account for the increases in oil prices. It is true that the global demand for oil has been growing thanks to the quick industrialization of China, India’s strength, and people’s desire for refined petroleum. However, even as global oil demand has jumped, global oil supply has increased even more, as have global oil inventories. According to the latest statistics, US oil inventories are at a level of 851.79 million, up from 850.62 million last week. At the same time, oil prices are on the rise, too. As of writing, oil extended gains for the third day, trading above $78 a barrel, amid evidence of China’s rebound and fresh signals the Federal Reserve may put the interest-rate hikes on hold this summer. These figures amply demonstrate that supply and demand in the market do not determine oil prices as clearly as it appears on the surface.    

Should You Still Invest in Gold?

Gold has always enjoyed a reputation as the most precious and stable commodity, a so-called safe haven where investors rush in during unstable economic times. There are sound reasons for gold’s high esteem, though some people dismiss the metal’s popularity as overblown and a trifle barbaric. They say gold’s worth is negligible compared to paper or digital currency, appealing only to goldsmiths and jewelry lovers. As an asset driven by demand and in reverse relationship with the US dollar, gold does not always offer security during geopolitical or economic turmoil.  

In the opposite camp are those who insist on gold’s intrinsic value, which makes it a must for investors to hold in their portfolios.  The reasons for appreciating gold abound. It symbolizes power and wealth and plays a crucial economic role as a means of exchange when a currency collapses. Gold is durable and indispensable in electronics, medical tools, dentistry, and the defense, aerospace, and automotive industries. As a store of value, gold affords handsome investment opportunities.

The paragraphs below explore the positive qualities of gold as an investment asset, explaining why it does not always serve as a safe port in economic and political storms, despite its value as a financial investment and allure as a precious metal.

Why Is Gold Valuable?

Gold is essential to the global economy, carrying importance in all societies, even though it has long stopped backing currencies. One of the reasons for its significance stems from its ability to preserve wealth through time. The same cannot be said about paper-denominated currencies. Consider this example to understand how much gold is more valuable than money. Suppose fifty years ago, you owned one ounce of gold. If you converted this amount of gold into paper money at that time, you would pocket slightly more than $35. Back then, you could buy a suit for this amount of money.

Now, $35 in the 70s is equivalent in purchasing power to about $269.87 today, which constitutes an increase of $234.87 over these years. When $35 is equivalent to $269.87 over time, this means that the actual value of a dollar decreases over time. That is, a dollar will pay for fewer items at the store. You will not buy a suit for $35 today, will you? But you will still purchase a suit today if you have an ounce of gold, which is trading at $1,845.90 at the moment of writing. If you decided to keep an ounce of the yellow metal fifty years ago, you would still have held a solid amount of wealth today. If you converted it to dollars, you would have lost your wealth because inflation has diminished the greenback’s value. The value of gold, by contrast, has increased.

Gold as a Hedge against the Dollar

Gold’s increasing value over time is why investors prefer putting money in it when the price of the dollar slides and inflation climbs. Gold usually moves in the opposite direction from the USD, typically soaring when inflation rises. When these unwelcome economic events occur, investors turn to gold, a hard asset that keeps its value.

Why Does Not Gold Always Act as Safe Haven?

Although gold is indeed a hedging tool against inflation, its price does not always react to inflation. Take the present situation in the world, for instance. When the Russian-Ukrainian war started a year ago, the precious metal surged. Yet as soon as the Federal Reserve tried to control inflation, its price declined. Gold presently remains under pressure on the back of the dollar index, which is now trading higher amid rising inflation in the US. This February was a cruel month for the gold sector. The yellow metal lost around $100 in value after rallying slightly in January. Spot gold started the month at $1,928.26, and, as of writing, it is trading at $1,841.22. The last time gold shed that much was in June 2021, when it sank from $1,907.42 to $1,769.80, giving up more than $130 on the month.

Analysts explain that gold is falling because the Federal Reserve pushes interest rates gradually in an attempt to save the US economy from recession. After the US inflation reached 8.6%, the Feds increased the interest rate by 0.75%. The greenback strengthened as a result. The 10-year US benchmark interest rate reached 3%. If, in spring, the Federal Reserve tightens interest rates more aggressively, investors might rush to purchase gold to counter a decline in equities and thereby move its prices higher.

Why Invest in Gold?

Although gold does not always provide security, it carries undeniable value derived from its intrinsic metal content rather than a promise to pay. It is also valuable because it can be exchanged or traded anywhere in the world for other assets, paper-dominated currencies, or tangible goods. As gold is a liquid market, you can easily trade it or sell it to other investors or dealers. You can also hold physical gold directly in the form of bullion, coins, or jewelry. Or you may choose to have it indirectly via mutual funds, EFTs, gold derivatives, or gold-mining stocks. Those looking to protect their finances in these economically unstable times might consider including gold in their portfolio. The precious metal might be on a losing streak now, but it has a reliable store of value and might soon redeem its losses. However real is the threat of recession, it is safe to view gold as an asset for investment.   

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