RISING DOLLAR PUNISHES GOLD -- SO DOES THE PROSPECT FOR HIGHER RATES

DOLLAR JUMPS ON FED MESSAGE...  The Fed's more hawkish tone yesterday set off a number of intermarket reactions.   Stocks sold off (although not by that much), and bond yields rose.   Prospects for higher rates in the U.S. also had a positive impact on the dollar.   Chart 1 shows the Invesco US Dollar Index jumping sharply today following a big advance yesterday.   The UUP is now testing its 200-day moving average.    One side effect of the stronger dollar has been heavy selling of gold which appears to have lost its role as an inflation hedge.

GOLD PLUNGES ON STRONGER DOLLAR...Gold has historically been viewed as an inflation hedge.  So far it hasn't lived up to that reputation.   Chart 2 shows the Gold Shares SPDR (GLD) plunging  today and falling below both moving average lines.   A rising dollar has a lot to do with that.   So does the prospect for higher U.S. interest rates.   Since gold is a non-yielding asset, it does worse when U.S. interest rates are rising; or are expected to rise.

BOND YIELDS JUMP... The direction of bond yields offers some clues about inflation expectations.   Higher inflation usually produces higher bond yields.   The Fed's admission that it's beginning to talk about some tapering of its bond purchases also raises the odds for higher yields.   Bond yields rose on the more hawkish sounding Fed statement.   But so far no trend change has taken place.   Chart 3 shows the 10-Year Treasury yield still trading below its 50-day moving average and downtrend line drawn over its March/May highs.   A close above that falling trendline would signal higher yields.   And could have a more negative impact on stock prices.