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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.

Gold smashes $2,200, all-time highs. What does it mean for US dollar?

Gold hits $2,200 after a dovish Fed meeting, setting new records. Combined with a dollar bounce back, does this surge hint at a changing relationship between gold and USD?

Source: Bloomberg

Data current as of 3/21/2024

Key points

  • Gold prices hit new highs above $2,200: (0:42)
  • Gold negatively correlated to interest rates: (1:13)
  • How is gold at all-time highs?: (2:28)
  • US dollar bounces back after dovish FOMC: (3:39)
  • US dollar-gold correlation relatively weak: (4:40)

Gold prices hit new highs above $2,200

Following a dovish Federal Reserve meeting, gold futures soared, reaching unprecedented highs beyond the $2,200 mark. This rally exemplifies how monetary policy, particularly signals from central banks like the Fed, can significantly impact gold prices. With Fed Chair Powell confirming the likelihood of lower interest rates coming this year, future demand for gold could grow.

Gold negatively correlated to interest rates

Historically, gold prices have shown a negative correlation with interest rates: when rates drop, gold often rallies, reflecting its appeal as an investment alternative to interest-bearing assets. This relationship suggests that traders closely monitor central bank activities and interest rate forecasts, as these factors can provide insights into potential movements in the gold market.

How is gold at all-time highs?

Despite the Federal Reserve maintaining interest rates at 5.5%, expectations set by the Fed's dot plot anticipate a decrease to below 3.0% in coming years - with three 25bps cuts expected this year. This forecast has fueled the surge in gold prices to all-time highs, underlining the influence of projected monetary policy changes on investor confidence and market dynamics, particularly for precious metals.

US dollar bounces back after dovish FOMC

Despite initial weakness in response to dovish Federal Open Market Committee (FOMC) rate expectations, the US dollar has rebounded, appreciating against all major currency pairs. This recovery highlights the complex interplay between monetary policy, investor sentiment, and currency valuations, offering traders insights into how shifts in Fed expectations can affect the forex market.

US dollar-gold correlation relatively weak

While there is a recognized correlation between the US dollar and gold prices, it is not absolute—high gold prices do not invariably mean lower dollar values. However, they have shared a negative correlation historically, suggesting that positve movements in one often coincides with negative moves in the other. In recent months, this negative correlation has weakened, now close to only -0.25.

How to trade US dollar

  1. Open an account to get started, or practice on a demo account
  2. Choose your forex trading platform
  3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex broker like IG. Many traders watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.

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