Gold and U.S. dollar exchange traded funds are moving in separate directions again after a strengthening U.S. economy renewed speculation that the Federal Reserve could hike interest rates before the end of the year.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) rose 0.2% Wednesday and is trading back above its 200-day simple moving average. UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
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Meanwhile, the SPDR Gold Shares (NYSEArca: GLD), the largest physically backed gold ETF, fell 1.1% and the VanEck Vectors Gold Miners ETF (NYSEArca: GDX), the largest gold miners ETF by assets, declined 5.0% on Wednesday.
The divergence reflects growing speculation that the Federal Reserve may hike rates by the end of the year. Options traders now price in a 21% chance the Fed could hike borrowing costs in September, compared to a 2% chance just two weeks ago, reports Jamie Chisholm for Financial Times.
[related_stories]Fueling bets of a potential Fed rate hike, new-home construction in the U.S. rose more than previously expected, adding on to a number of recent reports that indicated the economy is strengthening, writes Lilian Karunungan for Bloomberg.
“The market will recalibrate on Fed rate-hike expectations to price in at least one” this year, Charlie Lay, a foreign-exchange strategist in Singapore at Commerzbank AG, told Bloomberg. “That should support the dollar.”
The U.S. Dollar Index, which tracks the dollar against a basket of major international currencies, rose 0.12% to 97.17 on Wednesday, its highest level since March.
An interest rate hike also weighs on gold prices since the precious metal pays its investors nothing and struggles to compete with yield-bearing assets when rates rise.
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Moreover, concerns over economic instability in a post-Brexit world have subsided, further pressuring the precious metals market. The shift away from safe-havens toward riskier assets has diminished the attractiveness of bullion.
“Gold had everything going for it,” Bill O’Neill, a broker at LOGIC Advisors, told the Wall Street Journal. “Now we’re in a period where things are a lot calmer…The perfect playing field that existed for gold is not in play for the short term.”
PowerShares DB U.S. Dollar Index Bullish Fund