Gold hits 4388 as dollar index falls to four-month low

Gold reached 4388 dollars per ounce on Wednesday. The dollar index fell to 98.6, its lowest level in four months. The 10-year Treasury yield rose to 4.8 percent, the highest level since 2023. According to GN markets/fx (en-US), these moves occurred simultaneously. Gold and yields typically move in opposite directions. Their joint rise indicates a shift in market expectations.

Investors increased bets on a Federal Reserve rate hike. The probability of a hike at the next FOMC meeting rose from 35 percent to 60 percent. This shift followed remarks by Fed Chair Kevin Warsh. His speech signaled a commitment to keeping inflation under control. The market reaction contradicted expectations of a dovish policy stance.

Fed Chair Defies White House Expectations

Kevin Warsh was confirmed as Fed Chair in May. His nomination was viewed as a move toward rate cuts. He instead held rates steady at 3.50 to 3.75 percent. Three regional presidents dissented from this decision. They advocated for an immediate rate increase. Warsh cited inflation data that had exceeded the 2 percent target for 65 months.

His Jackson Hole speech emphasized the need for clear inflation progress. Markets interpreted this as a pre-commitment to hawkish policy. This stance created tension with the administration that appointed him. The divergence in policy views has altered currency dynamics.

Dollar Weakness Amidst Rising Yields

Higher US yields usually strengthen the dollar. Foreign capital typically flows into US Treasuries for higher returns. This pattern did not hold during the recent trading sessions. The dollar index declined for three consecutive days. Investors priced in institutional friction within the US government.

Treasury Secretary Scott Bessent highlighted the fiscal costs of high yields. He expressed concern over the affordability of borrowing costs. This put him at odds with the Fed Chair. Oil prices near 100 dollars per barrel added to inflation pressures. Gold emerged as the primary asset for hedging these risks.

Central Banks Diversify Away From Treasuries

Foreign central banks are reducing their holdings of US Treasuries. China’s positions are at an 18-year low. Japan reduced its holdings by 123 billion dollars since February. This reduction funded yen intervention. Foreign central banks shed 72 billion dollars in June alone.

These actions represent marginal diversification rather than a full exit. No alternative asset offers the same liquidity as Treasuries. Central banks are shifting assets into gold. Dollar-pegged stablecoins provide a new channel for dollar demand. USDC processed 1.79 trillion dollars in June. The future of the reserve currency depends on these competing forces.