Dollar Depreciation Trading Resumes, Gold Strengthens, Emerging Market Currencies Benefit

On August 25, concerns over the depreciation of the dollar intensified due to the widening U.S. fiscal deficit, government debt surpassing $40 trillion, and the impact of the U.S. Treasury's buyback plan. Gold and emerging market currencies have strengthened recently. Gold has risen for the fifth consecutive week, with August's gains expected to be the largest monthly increase since 1999; the dollar index fell to a three-month low last week. The U.S. Treasury raised the upper limit of long-term Treasury buybacks from $2 billion to at least $4 billion last week and may utilize about $1 trillion from the Treasury's general account to support the buybacks. However, the yield on 30-year Treasury bonds briefly rose to 5.34%, indicating that the market believes the buybacks will struggle to reverse the long-term pressures from fiscal deficits, inflation, and debt supply. The market has begun to re-bet on the Federal Reserve raising interest rates, with federal funds futures showing that the probability of a rate hike at the Fed's October meeting has risen to about 56%, an increase of more than 7 percentage points from a week ago. Some institutions believe that if the Fed does not align with fiscal policy, the current dollar depreciation trade will still struggle to form a definitive trend. Meanwhile, gold, resource-based emerging market currencies, and commodities may become beneficial assets in a pressured dollar environment. Analysts at Deutsche Bank believe that gold could break the target price of $4,800 per ounce.

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