The wave of rate cuts is coming, and non-US currencies are rising together: Will the US dollar be marginalized?

This wave of dollar weakness has come faster and more fiercely than expected. The Federal Reserve announced a 25 basis point rate cut to the 3.50%-3.75% range, with Chair Powell signaling a dovish stance and hinting at a possible pause in January next year. However, the market has already pre-empted this—pricing in more rate cuts by 2026. As a result, the US Dollar Index (DXY) has retreated from recent highs, recently breaking below the 98.313 low, down more than 9.38% year-to-date. Correspondingly, non-USD currencies such as the euro, pound, and Swiss franc have all appreciated, and even the USDTWD exchange rate most watched by Taiwanese investors continues to decline, indicating a weakening of the dollar’s purchasing power.

Dovish policies can’t beat market expectations; the dollar is “overvalued”

On the surface, it’s a Fed rate cut; deeper down, it’s a gap between market pricing and policy direction. The Fed’s new dot plot projects only one rate cut in 2025, but the market has already priced in two (about 50 bps), and this expectation gap has directly triggered dollar selling pressure. UBS forex strategists point out that the market initially viewed the Fed as more hawkish, but in reality, it has been relatively dovish, while the Reserve Bank of Australia, Bank of Canada, and European Central Bank have shifted toward hawkish stances, creating a stark contrast—making dollar weakness inevitable.

What’s more, the Fed just announced it will purchase $40 billion in short-term government bonds starting December 12 to inject liquidity, further weakening the dollar’s safe-haven appeal. Amid a flurry of policy adjustments by global central banks, the dollar has shifted from a “safe haven” to a “weak currency,” prompting investors to reallocate their assets.

Capital rotation triggers a major rebound in risk assets

The most immediate winners of the dollar’s depreciation are tech stocks. The S&P 500 tech sector has gained over 20% this year. JPMorgan analysts note that for every 1% decline in the dollar, tech earnings can increase by 5 bps, especially benefiting multinational companies, as a weaker dollar boosts export competitiveness and lowers borrowing costs.

Gold is a traditional safe-haven winner, rising 47% this year to break through $4,200 per ounce, hitting a new all-time high. Central banks have purchased over 1,000 tons (led by China and India), ETF inflows have surged, and the dollar’s weakness has amplified inflation hedging demand.

Emerging markets have become the biggest beneficiaries of this rally—MSCI Emerging Markets Index has risen 23% this year, with South Korea and South Africa stocks benefiting from strong corporate earnings and a falling dollar. Currencies like the Brazilian real have led gains among emerging markets, and Goldman Sachs research indicates that the dollar’s weakness has directly stimulated capital inflows into emerging market bonds and equities. In comparison, Asian emerging market currencies like the USDTWD have also received support due to this trend.

But risks are also brewing

The chain reaction is often a double-edged sword. Dollar weakness pushes up prices of commodities like oil (up 10% this year), intensifying inflation concerns; if US stocks overheat, high-beta assets’ volatility could also be amplified. A Reuters poll shows that 73% of 45 analysts expect the dollar to weaken further by year-end, but if December’s CPI data (expected to be released on the 18th) comes in strong, there’s also a risk of the DXY rebounding to 100.

Will the dollar really weaken? The key depends on these two data points

The seemingly one-sided dollar decline actually contains a reversal mechanism. If December’s CPI and employment data come in strong (e.g., non-farm payrolls unexpectedly increase by 119,000 in September), intra-Fed dissent (three members opposed rate cuts at this meeting) could turn hawkish, pushing the DXY back to the 100 level. Jefferies economists say that December’s meeting has a 50/50 chance, with employment data being the key—markets are overreacting to labor market signals.

Additionally, the widening US fiscal deficit and government shutdown fears could temporarily support safe-haven demand for the dollar, creating a technical rebound opportunity.

What should investors do

In the short term, the probability of a weaker dollar is higher, but don’t forget that this rally is based on market overreactions. Analysts recommend diversifying into non-USD currencies and gold, considering opportunities in Asian currencies like USDTWD, and avoiding excessive leverage exposure to manage volatility. The phase of re-evaluating monetary policy has just begun, and the long-term trend will depend on the depth of economic slowdown.