Will the US dollar rise again? Shifting from dovish to reevaluate monetary policy

The Fed’s dovish stance is triggering intense adjustments in global markets. The US dollar index has fallen to a low of 98.313, down more than 9% year-to-date, revealing a fundamental reassessment of monetary policy outlooks behind this decline. The key question is: will this dollar weakness continue, or is it just a short-term correction?

Dovish signals trigger a major capital shift

Although the December Federal Reserve decision aligned with expectations by cutting interest rates by 25 basis points, Chairman Powell’s message at the press conference disappointed the market. He hinted that the January meeting might pause rate cuts, emphasizing that current rates are in a “neutral range,” with future decisions to be data-dependent.

This seemingly cautious language sparked optimistic expectations among investors. Market pricing shows that investors are betting on two more rate cuts (about 50 basis points) in 2025, but the Fed’s newly released dot plot only maintains a median expectation of one cut. This significant gap directly translates into dollar selling pressure.

UBS’s foreign exchange team pointed out the core issue: the Fed’s relatively dovish stance contrasts sharply with the recent hawkish turn by the Reserve Bank of Australia, Bank of Canada, and European Central Bank, which naturally pushes down the dollar. More importantly, the Fed also announced it will purchase $40 billion in short-term government bonds starting December to inject liquidity, further weakening the dollar’s appeal as a safe-haven asset.

The ripple effects of dollar decline on various assets

The dollar’s weakness has initiated a re-pricing of assets:

Tech and high-growth stocks gain momentum. For every 1% depreciation of the dollar, earnings of listed tech companies increase by 5 basis points, especially benefiting multinational corporations. This explains why the S&P 500 tech sector has risen over 20% this year, continuing to rebound despite some individual company disappointments.

Gold becomes the biggest winner. Year-to-date, gold has surged 47%, breaking through $4,200 per ounce to hit a new high. Central bank buying momentum is strong, with China and India leading purchases of over 1,000 tons. ETF inflows have surged, and dollar depreciation has amplified investors’ demand for inflation hedging.

Emerging markets present long-awaited opportunities. The MSCI Emerging Markets Index has gained 23% this year, with South Korea, South Africa, and others benefiting from strong local corporate earnings and capital inflows driven by dollar weakness. Currencies in emerging markets like Brazil are leading the rally.

However, this double-edged sword also brings concerns: dollar weakness has pushed up commodity prices like oil by 10%, intensifying inflation worries; if US stocks overheat, the risk of high-volatility assets also increases.

Will the dollar rise again? Key data to watch

In the short term, a weaker dollar seems to be the market consensus. According to a Reuters poll, 73% of analysts believe the dollar will further depreciate by the end of the year. But this view is not set in stone.

The turning point will be upcoming employment and inflation data. If December’s CPI and non-farm payrolls outperform expectations (similar to the surprise of adding 119,000 jobs in September), hawkish voices within the Fed could strengthen—already, three members oppose rate cuts at this meeting. If economic resilience is confirmed, the dollar index could rebound to the 100 level.

J.P. Morgan economists note that the next rate cut decision is “50-50,” with labor market data being the key factor tipping the scales. Currently, the market seems to overreact to labor signals.

Additionally, the expanding US fiscal deficit and potential government operational risks could temporarily boost the dollar’s safe-haven demand, hindering further declines.

Investors’ strategic considerations

Analysts conclude that the market is in a period of reassessment of monetary policy. Will the dollar rise again? The answer depends on the depth of economic slowdown and the true state of the employment market.

In this highly uncertain environment, prudent strategies include diversifying into non-US currencies and defensive assets like gold, while avoiding excessive leverage. The short-term trend of the dollar may fluctuate, but long-term direction requires further confirmation from economic data.