Wall Street Resumes "Dollar Depreciation Trade": Gold Strengthens, Emerging Market Currencies Benefit, But Still Requires Fed Support

BlockBeats News, August 25th. Fueled by the expanding US fiscal deficit, the government debt surpassing $40 trillion, and the US Treasury's bond buyback plan, the market has shown increasing concerns about US dollar depreciation, leading to a recent surge in gold and emerging market currencies. Gold has been on the rise for the fifth consecutive week, with the August increase expected to be the largest monthly gain since 1999, while the US Dollar Index fell to a three-month low last week.

Last week, the US Treasury raised the long-term Treasury bond buyback limit from $20 billion to at least $40 billion and may use around $1 trillion from the Treasury General Account (TGA) to support the buyback. However, the 30-year Treasury bond yield still rose to 5.34% at one point, indicating that the market believes the buyback will struggle to alleviate the long-term pressure from the fiscal deficit, inflation, and debt supply.

At the same time, the market has begun to bet on the Federal Reserve's interest rate hikes. Federal funds futures show that the probability of a rate hike at the Fed's October meeting has risen to about 56%, up over 7 percentage points from a week ago. Some institutions believe that if the Federal Reserve does not cooperate with fiscal policy, the current "dollar depreciation trade" will still struggle to form a definitive trend.

Meanwhile, gold, commodity-linked emerging market currencies, and commodities may become beneficiary assets in a dollar-weakening environment. Analysts at Deutsche Bank even suggest that gold may surpass the target price of $4,800 per ounce.