Markets Revive the "Weaker Dollar" Trade as Gold and EM FX Gain

According to Huo Xing Finance, August 25 saw renewed focus on potential U.S. dollar depreciation as concerns mount over a widening U.S. fiscal deficit, government debt topping $40 trillion, and the U.S. Treasury's bond buyback program. The shift has supported gold and several emerging-market currencies. Gold has advanced for five straight weeks, and August is on pace for its biggest monthly gain since 1999. The U.S. Dollar Index also slid last week to its lowest level in three months. The U.S. Treasury last week lifted the cap for long-term Treasury buybacks from $2 billion to at least $4 billion, and may use roughly $1 trillion from its Treasury General Account (TGA) to fund repurchases. Even so, the 30-year Treasury yield briefly climbed to 5.34%, a move seen as signaling that investors view buybacks as insufficient to counter longer-term pressure from fiscal deficits, inflation, and increased debt supply. Rate expectations are also being reset. Federal funds futures now imply about a 56% chance of a Fed rate hike in October, up more than 7 percentage points from a week earlier. Some institutions caution that without coordinated fiscal backing, the current "dollar depreciation trade" is unlikely to turn into a durable trend. Against this backdrop, gold, commodity-linked emerging-market currencies, and commodities may remain the main beneficiaries of a softer dollar. Deutsche Bank analysts have even suggested gold could exceed their $4,800-per-ounce target.