Global dovish wave arrives: Can the dollar depreciation trend continue, and what new variables are there in the yen's policy?

The Federal Reserve’s latest decision signals a dovish stance, triggering intense volatility in the global currency markets. The US dollar index hit a low of 98.313, down 9.38% year-to-date, while non-USD currencies and safe-haven assets ride the rally. The market’s reassessment of the 2025 rate cut outlook is changing capital allocation logic, but whether the dollar will weaken further remains uncertain.

Dollar Under Pressure: Policy Shift and Market Expectation Gap

Last week, the Federal Reserve decided to cut interest rates by 25 basis points to a range of 3.50%-3.75%. This decision was not surprising in itself, but Chairman Powell’s subsequent remarks defied market expectations. He hinted that the January meeting might hold steady, emphasizing that the Fed has already cut rates by 175 basis points and that policy is currently at a neutral level.

However, market reactions were entirely opposite. According to Reuters disclosures, the Fed’s new dot plot projects only one rate cut in 2025, well below market pricing of two cuts (about 50 bps). This expectation gap directly hit the dollar. UBS FX strategist Vassili Serebriakov pointed out that the Fed appears more dovish compared to other central banks—Australia, Canada, and the European Central Bank are shifting towards a hawkish stance—creating a stark contrast that continues to restrain the dollar’s performance.

It is also noteworthy that the Japanese yen policy faces similar adjustment pressures. As a major global reserve currency, the Bank of Japan’s moves will further influence the dollar ecosystem. The Fed announced it will purchase $40 billion in short-term government bonds starting December 12 to inject liquidity, further weakening the appeal of the dollar as a safe asset.

Chain Reaction: Risk Assets Enter Revaluation Window

The dollar’s weakening has opened Pandora’s box, shifting the price anchors of various assets.

Tech stocks and high-beta growth stocks stand out. The S&P 500 tech sector has gained over 20% this year. JPMorgan’s data models show that for every 1% depreciation of the dollar, tech earnings increase by 5 basis points—this is especially favorable for multinational companies’ overseas income conversions, while low borrowing costs also support corporate investment willingness.

Gold and precious metals markets surge. Gold has risen 47% this year, breaking the $4,200/oz historical high. Data from the World Gold Council shows central bank purchases exceeding 1,000 tons (led by China and India), with ETF net inflows surging. The dollar’s depreciation amplifies inflation hedging demand.

Emerging markets emerge as biggest winners. The MSCI Emerging Markets Index has risen 23% this year, driven by strong corporate earnings and dollar depreciation in countries like South Korea and South Africa. Goldman Sachs research indicates that the dollar’s decline attracts capital inflows into emerging market bonds and equities, with the Brazilian real and other non-USD currencies leading gains.

However, this double-edged sword also brings concerns. Commodity prices (crude oil up 10% this year) tend to rise with a weaker dollar, potentially fueling inflation expectations. If US stocks overheat, high-beta assets’ volatility could further amplify.

Turning Point: Data Releases Will Rewrite Expectations

Although the short-term dollar weakness remains the mainstream view, it may be premature to draw conclusions. A Reuters poll shows 73% of 45 analysts expect the dollar to weaken further by year-end, but this consensus could unravel if economic data remains strong.

J.P. Morgan economist Mohit Kumar said that if December’s CPI and non-farm payrolls data are robust, internal Fed disagreements (three members opposed rate cuts this meeting) could shift to a hawkish stance, pushing the dollar index back to 100. For example, the unexpectedly strong non-farm payroll increase of 119,000 in September could reverse market expectations.

Meanwhile, the ongoing US fiscal deficit expansion and government shutdown fears may temporarily support the dollar’s safe-haven demand, providing stability.

Outlook and Recommendations: Allocation Tips and Risk Warnings

The market is at a crossroads of global monetary policy reevaluation. The probability of short-term dollar weakness is relatively high, but the long-term trend depends on the depth of economic recession and the degree of policy synchronization among central banks.

Analysts recommend investors adopt a diversified allocation strategy: increase holdings in non-USD currencies and gold while closely monitoring the latest yen policy developments as key references; avoid excessive leverage exposure to cope with increasingly complex volatility; and keep a close eye on December employment and inflation data as critical triggers for adjusting positions.

In this period of growing uncertainty, flexible responses are wiser than one-way bets.