Gold rocketed to record peaks at US$1,975 on Tuesday while the US dollar plumbed two-year lows as investors wagered the Federal Reserve would reaffirm its super-easy policy outlook this week, and a tolerance for higher inflation.
The prospect of endless stimulus allowed Asian shares to shake off coronavirus concerns and Sino-US tensions to make early gains.
Nations around the globe are announcing new travel curbs amid a fresh wave of the coronavirus, a setback to hopes for a “V” shaped economic recovery.
Yet investors are taking comfort from the prospect of yet more fiscal spending and endless cheap liquidity, with Fed Chair Jerome Powell expected to sound reassuringly accommodative after a policy meeting on Wednesday.
“Fed officials have made clear that they will be making their forward guidance more dovish and outcome-based soon,” wrote analysts at TD Securities.
“The chairman is likely to continue the process of prepping markets for changes when he speaks at his press conference.”
One shift could be to average inflation targeting, which would see the Fed aim to push inflation above its 2 percent target to make up for years of under-shooting.
All of which helped MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS add 1.2 percent, while Japan's Nikkei firmed 0.6 percent even as the yen rose.
E-Mini futures for the S&P 500 ESc1 gained 0.4 percent, while EUROSTOXX 50 futures STXEc1 added 0.5 percent.
The Dow had ended Monday up 0.43 percent, while the S&P 500 gained 0.74 percent and the Nasdaq 1.67 percent.
The rise was again led by technology stocks as investors wagered on upbeat earnings reports due this week. Analysts also noted the falling dollar was a positive given that more than 40 percent of S&P 500 earnings come from abroad.
Dollar in decline
There were hopes some sort of stimulus extension could be hammered out as US Senate Republicans raced to complete details of a $1 trillion coronavirus aid proposal before enhanced unemployment benefits expire on Friday.
The proposal could involve a cut in benefits to $200 from $600, which would be a big blow to household incomes and spending power.
Aid is desperately needed given 30 million Americans are out of work and states are tightening social restrictions again, a trend that has also dragged on the US dollar.
Alan Ruskin, head of G10 strategy at Deutsche Bank, noted currencies had been tracking the relative performance of their economies, so that high-ranked economic performance was associated with stronger currencies.
“One clear pattern is how economies linked most tightly to China - including commodity producers as diverse as Australia, Chile and Brazil - have tended to perform better than economies most directly linked to the US, notably its NAFTA trading partners,” said Ruskin.
Indeed, the dollar has been falling almost across the board in recent days, reaching a two-year trough on a basket of currencies at 93.416. It in turn breached major chart support around 93.96/88, a bearish development that opens to way to at least 93.19 and 92.24.
The euro was up at $1.1766, having hit its highest since late 2008 at $1.1781, while the dollar touched its lowest against the Swiss franc since mid-2015.
The story was much the same against the Japanese yen, as the dollar skidded to a four-month trough at 105.10.
The trend reversal in the dollar combined with all the uncertainty over COVID-19 and the prevalence of negative real bond yields to light a fire under precious metals.
Gold flew to $1,975 an ounce on Tuesday having climbed $160 in just six sessions. Silver put on another 5 percent to reach $25.81, its highest since April 2013, and a gain of almost a third in seven sessions.
Oil prices also tend to benefit from a falling dollar but have been hampered by worries about demand as countries impose more travel restrictions.
Brent crude LCOc1 futures edged up 20 cents to $43.61 a barrel, while US crude CLc1 firmed 12 cents to $41.72.