Gold and Dollar Volatility Within an Optimal Currency Financing Strategy Framework
Tbilisi, Georgia – TBC Capital has released its latest macroeconomic update, highlighting recent volatility in gold and the US dollar and its implications for optimal currency financing strategies.
When analyzing exchange rates, the most common approach is to compare the Georgian lari (GEL) against the US dollar. It is therefore unsurprising that many observers react with some skepticism to the finding that, in reality, the lari has been significantly more stable against the euro. For TBC Capital’s readers, this is a well-established insight: while the lari may exhibit lower volatility against the US dollar in the short term, over a one-year horizon and longer, the opposite holds true. A similar pattern can be observed in other regional currencies.
Several factors explain this dynamic:
- Georgia’s economic cycles are more closely aligned with those of the European Union. As a result, economic growth tends to be stronger when the euro is relatively robust.
- Although the US dollar serves as the primary transactional currency in Georgia, it is not necessarily more closely linked to fundamental macroeconomic variables. The EU remains the main source of foreign currency inflows, while many of Georgia’s key economic partners—including oil exporters and neighboring countries—also align more closely with EU economic cycles. Historically, this was reinforced by the negative correlation between the US dollar and oil prices, although this relationship has weakened since 2022.
- The US dollar’s traditional safe-haven status has historically led to its appreciation during periods of global recession or heightened risk, exacerbating declines in dollar-denominated income. However, as noted in several TBC Capital publications, this status has partially shifted in recent periods.
Overall, the relative stability of the lari against the euro remains a fundamental component of TBC Capital’s optimal currency financing strategy. All else equal, this implies that borrowing in euros is generally preferable. However, recent developments in the Middle East have once again raised questions about the US dollar’s safe-haven role.
While TBC Capital emphasizes medium- and long-term indicators in shaping optimal currency strategies, short-term developments may signal the need to reassess longer-term projections. Accordingly, the key question—left open in last week’s summary—is whether current market reactions warrant adjustments to existing recommendations.
Dollar Strength and Gold Dynamics
Over the past month, the US dollar has strengthened globally against both the euro and other partner currencies. To assess whether this reflects renewed safe-haven demand or short-term dynamics, TBC Capital points to gold price movements as a key indicator.
In its November publication, TBC Capital argued that the previous rise in gold prices was largely driven by structural factors negative for the US dollar and positive for the euro. The current decline in gold prices raises the question of whether the trend has reversed. TBC Capital’s assessment is that it has not, for several reasons:
- The decline is not limited to gold but extends across safe-haven assets, including other precious metals and currencies such as the Swiss franc. Meanwhile, sentiment in US equity markets has not deteriorated significantly, suggesting that safe-haven demand is not currently a top priority for investors.
- Interest rates have risen markedly, reflecting increased inflation risks and expectations that central banks will maintain tighter monetary policy for longer or potentially tighten further. This negatively impacts non-yielding assets such as gold.
- Market reactions to news of potential de-escalation in geopolitical tensions indicate that inflation—not risk aversion—is the primary concern. Notably, reports suggesting a higher likelihood of conflict resolution have repeatedly triggered immediate increases in gold prices, which would not be the case if safe-haven demand were the dominant driver.
- Current trends in the US dollar, US Treasury yields, and gold prices closely mirror developments in 2022. Following the outbreak of the war in Ukraine, gold prices initially surged but later declined as inflation expectations drove higher interest rates and a stronger US dollar. Toward the end of 2022, as US inflation eased, the dollar weakened and gold prices rebounded.
The full report also outlines several short-term factors influencing gold price dynamics, including speculative activity, algorithmic trading, and profit-taking by investors—including central banks—following last year’s price increases.
Medium- to Long-Term Outlook
If the recent strengthening of the US dollar is not driven by renewed safe-haven demand, TBC Capital maintains that structural factors remain unfavorable for the dollar over the medium to long term. These include fiscal policy trends, rising institutional demand for gold, ongoing reserve diversification by central banks, and concerns over the independence of the US Federal Reserve.
Additionally, the dollar’s dominant global position is partly linked to the fact that oil prices are denominated in US dollars. In an evolving geopolitical environment, this factor may gradually weaken.
Strategic Implications
From a practical perspective, TBC Capital expects the euro to strengthen following the resolution of ongoing geopolitical tensions, particularly given that it remained undervalued against the US dollar even prior to recent developments. As such, the medium-term outlook for the US dollar remains relatively weak, supporting a higher share of dollar-denominated borrowing within a diversified financing strategy.
At the same time, TBC Capital advises greater caution in the short term. The outlook for the Georgian lari remains broadly neutral.
While the optimal loan portfolio structure depends on individual circumstances, TBC Capital’s recommended framework is outlined in last week’s summary.
The full report is available at.
