Gold prices have surged to a new record high above $2,500 per ounce, bolstered by a significant decline in the U.S. dollar, according to analysts.
As gold reaches unprecedented levels, the U.S. dollar has dropped to its lowest point since the start of the year, testing crucial support at 101 points. The U.S. Dollar Index (DXY), which measures the greenback against a basket of major global currencies, has fallen more than 2% since the beginning of August. Since July, as markets anticipated aggressive rate cuts later in the year, the dollar has depreciated by approximately 4%.
Some analysts believe this decline could be just the beginning for the U.S. dollar, as expectations mount for the Federal Reserve to initiate rate cuts at its upcoming monetary policy meeting. The CME FedWatch Tool indicates that a 25-basis point cut is fully priced in, with a 32% chance of a 50-basis point reduction.
Shivaan Tandon, a market economist at Capital Economics, predicts that the U.S. dollar will continue to weaken. Tandon’s firm forecasts the dollar index could fall to 98 points by the end of 2025. He attributes this potential decline to the Fed‘s expected policy loosening and a likely soft landing for the U.S. economy. “With the Fed set to start easing policy and given the probable soft landing for the U.S. economy, we expect unfavorable rate differentials and strong risk appetite to contribute to further dollar weakness,” Tandon noted.
However, Tandon also highlights potential risks. A severe recession could bolster the dollar as safe-haven demand rises. “If the U.S. economy were to face a deep recession, it could drag down the global economy and lead to renewed dollar strength,” he cautioned.
Attention now turns to Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday. Ricardo Evangelista, Senior Analyst at ActivTrades, expects Powell to address concerns over the U.S. economy and inflation progress. “Powell’s speech is likely to signal the start of the Fed’s rate-cutting cycle in September. If this occurs, it could lead to lower Treasury yields and a softer dollar, potentially driving gold prices to new highs,” Evangelista said.
Despite the bullish outlook for gold, some analysts caution that current market expectations may be overblown. Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, suggests that the market’s dovish expectations for the Fed might be excessive. “The current expectations for a dovish Fed could be too optimistic, potentially pressuring gold as it nears overbought levels,” Ozkardeskaya warned.
Additionally, currency analysts at Brown Brothers Harriman see the dollar as oversold in the short term. They anticipate that Powell might adopt a less dovish stance than expected. “While Powell is expected to signal a September rate cut, we believe the market’s aggressive easing expectations might be excessive. We anticipate a 25 basis point cut rather than a 50 basis point reduction, with Powell likely emphasizing a data-dependent approach to policy,” they said.
Despite potential short-term volatility in the dollar, analysts agree that gold remains a solid investment, with a favorable long-term outlook for the precious metal.
