The US dollar enters a weakening cycle, and inflation expectations reshape the global asset landscape

Concerns over the US inflation index have dissipated, prompting a policy shift. The Federal Reserve’s dovish stance has triggered a multi-day decline in the US Dollar Index (DXY). The market is experiencing a wave of asset revaluation, with investors shifting from defensive to offensive allocation logic. The dollar’s trend is also diverging from strength to fragmentation.

How Looser Interest Rate Expectations Are Rewriting the Dollar Story

The Fed’s decision to hold interest rates steady on December 10th seemed ordinary; a 25 basis point cut was in line with expectations. However, Powell’s wording at the press conference hinted that policy space may have reached its limit. The US Dollar Index subsequently fell to 98.313, down more than 9.38% year-to-date, hitting a recent low. The key to this turning point lies in market expectations for future interest rate paths—investors generally anticipate two or more rate cuts in 2025, challenging the Fed’s conservative forecast of only one.

UBS FX strategist Vassili Serebriakov pointed out that the fundamental reason for the dollar’s pressure is the divergence in policy expectations. Compared to the hawkish shifts by the Reserve Bank of Australia, Bank of Canada, and European Central Bank, the Fed has maintained an easing stance. This asynchronous policy stance continues to weaken the dollar’s relative attractiveness. Additionally, the Fed’s initiation of a $40 billion short-term Treasury purchase plan on December 12th further diminishes the dollar’s role as a safe-haven asset.

Asset Price Reordering Amid Dollar Depreciation

The weakening dollar is reshaping the global asset landscape. Tech stocks and high-growth equities have rebounded due to the dollar’s weakness, which boosts export competitiveness and lowers financing costs. The S&P 500 technology sector has gained over 20% this year. JPMorgan research indicates that a 1% depreciation in the dollar can increase tech earnings by 5 basis points, especially benefiting multinational corporations.

Gold markets have performed remarkably well, with a 47% increase year-to-date, surpassing $4,200 per ounce and hitting a record high. Central bank purchases remain strong (led by China and India), coupled with accelerated ETF inflows, further amplifying gold’s appeal as an inflation hedge amid a softer dollar. Marginal improvements in the US inflation index have led to increased demand for gold as a safe haven, reflecting market concerns over long-term purchasing power risks.

Emerging markets are the biggest beneficiaries of the dollar’s weakness. The MSCI Emerging Markets Index has risen 23% this year, with stock markets in South Korea, South Africa, and others benefiting from strong local corporate earnings and the dollar decline. Goldman Sachs research shows that the dollar’s weakness is driving capital flows into emerging market bonds and equities, with currencies like the Brazilian real leading gains.

However, this wave of asset revaluation also carries risks. The softer dollar has pushed up commodity prices such as oil (about 10% increase), reigniting inflation concerns. If US stocks become overly heated, the volatility of high-beta assets could further amplify, increasing the risk of correction.

Is the Weakening Dollar the Endgame or a Mid-Stage?

Despite the short-term downward trend, the dollar is not destined for a one-sided decline. The key variables are upcoming economic data—December CPI and employment reports—that will serve as a watershed for the dollar’s direction. If data come in unexpectedly strong (e.g., a significant increase in non-farm payrolls), the divergence within the Fed (which opposed rate cuts at this meeting) could turn into a policy shift signal, with the DXY potentially rebounding to the 100 level.

J.P. Morgan economist Mohit Kumar believes that the certainty of the next rate cut is only 50/50. Employment market performance will influence market expectations, and current markets may be overreacting to labor market signals. Additionally, the US fiscal deficit expansion and government shutdown risks (ongoing since November) could temporarily support the dollar’s safe-haven appeal.

A Reuters poll shows that 73% of analysts expect the dollar to weaken further before year-end, but opposing voices are growing—if December CPI data unexpectedly rises, markets may face a rapid reassessment.

Investment Strategies for Navigating Volatility

The current market is at a critical stage of monetary policy re-pricing. In the short term, the probability of a weaker dollar is higher, but the long-term trend depends on the depth of an economic recession. Investors should consider diversifying into non-US currencies and gold holdings, while avoiding excessive leverage exposure, to prepare for potential shifts in market rhythm and the reassessment of the US inflation index.