The Fed's dovish shift triggers a chain reaction. Will the US dollar rise again?

Will the US dollar stop falling and rebound? The key lies in the upcoming economic data releases. A Reuters poll shows that among 45 analysts, 73% expect the dollar to weaken further by the end of the year, but if December CPI data (expected to be released on December 18) comes in strongly, the DXY index could rebound to the 100 level. Jefferies economist Mohit Kumar straightforwardly states: “Employment data will be a decisive factor; the market may be overreacting to labor market signals at the moment.” This suggests that the dollar’s weakness is not set in stone, and a rebound window still exists.

Policy Pricing Discrepancies Drive Dollar Selling Pressure

The Federal Reserve announced a 25 basis point rate cut to a range of 3.50%-3.75% this Wednesday, in line with market expectations, but Chair Powell signaled a neutral leaning stance at the press conference. He emphasized, “We have cut rates by 175 basis points and are within a neutral rate range; the economic evolution will determine the next steps,” while hinting at a possible pause at the January meeting.

More critically, the gap between the Fed’s new dot plot and market pricing is causing pressure. The Fed maintains a median expectation of only one rate cut in 2025, but the market was originally pricing in two cuts (about 50 basis points). This expectation mismatch has led to concentrated dollar selling. UBS FX strategist Vassili Serebriakov notes that the Fed’s relatively dovish stance contrasts sharply with the hawkish turn of the Reserve Bank of Australia, Bank of Canada, and European Central Bank, which will continue to suppress the dollar. Additionally, the Fed 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.

DXY Falls to 98 Low, but Rebound Still Possible

The dollar index has continued its recent decline, touching a low of 98.313 yesterday, down 0.26% from the previous close, with a total depreciation of over 9.38% this year. The dovish tone from the Fed has boosted non-US currencies like the euro, pound, and Swiss franc, but analysts warn that whether the dollar weakens further depends on upcoming employment and inflation data.

If the economy proves more resilient than expected, the chances of a dollar rebound will increase significantly. A Reuters analysis indicates that if December CPI and employment data come in strong, Fed dissenters (there are 3 opposed to rate cuts in this meeting) may shift to a hawkish stance, pushing the DXY index back to 100. Moreover, the widening US fiscal deficit and government shutdown fears could temporarily support safe-haven demand for the dollar, providing additional upward momentum.

Weakening Dollar Triggers Asset Revaluation Wave

The asset reallocation driven by dollar weakness has already become apparent. Tech stocks and high-beta growth stocks in the US stock market are gaining support, with the S&P 500 tech sector up over 20% year-to-date, as dollar weakness enhances export competitiveness and lowers borrowing costs. JPMorgan analysis shows that for every 1% decline in the dollar, tech earnings can increase by 5 basis points, especially benefiting multinational corporations.

Gold, as a safe-haven asset, has surged significantly, up 47% this year, breaking through $4,200 per ounce to hit a record high. Data from the World Gold Council shows 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 are the biggest winners, with the MSCI Emerging Markets Index up 23% year-to-date; South Korea and South Africa stocks benefit from strong corporate earnings and a falling dollar, while currencies like the Brazilian real lead gains.

However, the weak dollar also has a double-edged effect. Rising commodity prices (such as a 10% increase in oil) heighten inflation concerns, and if US stocks overheat, high-beta assets could see increased volatility. This chain reaction reminds investors that whether the dollar will rise again depends on economic data strength, and close attention should be paid to CPI and employment reports in the short term.

Long-term Trends Depend on the Depth of Economic Slowdown

Analysts emphasize that the current market is in a phase of reevaluating monetary policy. While the probability of a weaker dollar in the short term is higher, the long-term trend depends on the severity of the economic slowdown. If the labor market remains strong, the Fed may maintain a prolonged pause in rate cuts, which would support a dollar rebound.

Investors should diversify into non-US currencies and gold, avoiding excessive leverage exposure, to prepare for the possibility of further dollar gains or continued weakness. The current uncertainty means that flexible asset allocation strategies are more important than betting on a single direction.