Wall Street Revives the "Weak Dollar" Trade as Gold and EM FX Rally

BlockBeats reports that on Aug. 25, renewed focus on the widening U.S. fiscal deficit, federal debt topping $40 trillion, and the U.S. Treasury's repurchase initiative has reignited concerns about a weaker dollar, lifting gold and emerging-market currencies. Gold has advanced for five straight weeks and is on pace for its strongest monthly gain since 1999. The U.S. Dollar Index fell last week to its lowest level in three months. The U.S. Treasury last week increased the ceiling for long-dated Treasury buybacks from $2 billion to at least $4 billion, and could channel roughly $1 trillion from its Treasury General Account (TGA) to support the program. Even so, 30-year Treasury yields briefly climbed to 5.34%, signaling investor skepticism that buybacks can counter longer-term pressure from deficits, inflation, and heavier debt issuance. Markets have also adjusted expectations for further Fed tightening. Federal funds futures now imply about a 56% chance of a rate hike at the October FOMC meeting, up more than 7 percentage points from a week earlier. Some institutions argue that without closer coordination between monetary and fiscal policy, the current "dollar depreciation trade" may struggle to develop into a clear trend. In the meantime, gold, commodity-linked emerging-market currencies, and commodities are seen as potential beneficiaries as the dollar remains under pressure. Deutsche Bank analysts say gold could even exceed their $4,800-per-ounce target.