Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/329155 
Year of Publication: 
2024
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 12 [Issue:] 9 [Article No.:] 229 [Year:] 2024 [Pages:] 1-10
Publisher: 
MDPI, Basel
Abstract: 
We examine the relationship between gold prices and the U.S. dollar exchange rate, arguing that their interactions are state-dependent and asymmetric under different market conditions. State dependency hinges on different short-term interest rate zones. To prove this point, we determine three distinct levels or zones of the effective federal funds rate using SETAR(2,p) tests. Subsequently, we perform conditional least square estimations of log changes in gold prices as a function of log changes in the nominal broad U.S. dollar exchange rate index for each of the obtained zones. Their relationship is consistently inverse, suggesting that gold and the U.S. dollar are risk-hedging substitutes for normal market periods. This also implies that gold is a safe-haven asset against the U.S. dollar exchange rate risk against a broad range of currencies. The substitution is weaker in the low-interest rate zone, more robust in the intermediate zone, and very pronounced in the high zone. We also perform a Markov switching test on the double-log function of gold prices and the exchange rate. The tests show a pronounced inverse relationship, i.e., substitution between assets, at normal market conditions. The relationship becomes significantly positive during episodes of financial distress, indicating complementarity between gold and U.S. dollar assets.
Subjects: 
effective federal funds rate
exchange rates
gold prices
Markov switching
SETAR
JEL: 
C58
F31
F37
G11
G15
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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