The US dollar hits bottom, and a dovish market dominates: Under the restraint of US inflation data, global assets are being reshuffled.

The US Dollar Index (DXY) recently hit a low of 98.313, down more than 9.38% year-to-date, reaching multi-month lows. Behind this decline is the dovish stance of the Federal Reserve (Fed) and a reassessment by the market of the US inflation index trend, prompting global investors to adjust their asset allocations. In the face of the dollar’s depreciation trend, risk assets and non-US currencies have become new focal points for capital flows, but the potential rebound risk of inflation cannot be ignored.

Fed’s Dovish Stance Triggers Dollar Selling

Fed Chair Jerome Powell announced a 25 basis point rate cut to a range of 3.50%-3.75% this Wednesday, bringing the total cut to 175 basis points. While this decision aligned with market expectations, Powell hinted at a possible pause in rate cuts at the January meeting and emphasized that “economic developments will determine the next policy steps,” attempting to convey a cautious tone.

However, the new dot plot released by the Fed shows a clear divergence from market pricing. The Fed only expects one rate cut in 2025 (about 25 bps), far below the market-wide expectation of two cuts (50 bps). This expectation gap has directly pressured the dollar.

UBS FX strategist Vassili Serebriakov noted: “The market initially expected a more hawkish stance from the Fed, but the relatively dovish reality contrasts sharply with the hawkish turn by the Reserve Bank of Australia, Bank of Canada, and European Central Bank, continuing to suppress the dollar’s safe-haven status.”

Additionally, the Fed announced the purchase of $40 billion in short-term government bonds starting December 12 to inject liquidity, further weakening the dollar’s appeal as a safe-haven asset.

US Inflation Index Trends Become Key Variable

The deeper reason for the dollar’s decline lies in the market’s re-pricing of US inflation and policy outlooks. If December CPI data (expected to be released on December 18) shows strong performance, it could reverse the current dovish expectations and push the dollar back up to the 100 level. Jefferies economist Mohit Kumar warned: “Employment data has become the focus of market trading; any unexpectedly strong employment growth could reignite hawkish voices within the Fed.”

A Reuters poll shows that over 73% of 45 analysts expect the dollar to weaken further before year-end, but this consensus expectation itself carries reversal risks. Three Fed members opposed rate cuts at this meeting, reflecting clear disagreements within the decision-making body. Any unexpected economic data could alter market expectations.

Dollar Weakness Triggers Global Asset Revaluation

The rolling effects of dollar depreciation are spreading across global capital markets:

Tech Stocks and Risk Assets Supported: A weaker dollar enhances export competitiveness and lowers borrowing costs. JPMorgan analysis indicates that a 1% decline in the dollar can boost tech earnings by 5 bps. The S&P 500 tech sector has gained over 20% this year, with multinational companies benefiting from currency gains due to dollar depreciation.

Gold Becomes a Major Beneficiary: As a traditional safe-haven asset, gold has risen 47% this year, surpassing $4,200/oz to hit a record high. Data from the World Gold Council shows central banks worldwide purchased over 1,000 tons (led by China and India), with ETF inflows surging simultaneously, reflecting investors’ urgent demand for inflation hedging.

Net Capital Flows into Emerging Markets: The MSCI Emerging Markets Index has gained 23% this year, with stocks in South Korea, South Africa, and other regions performing well due to strong corporate earnings and the dollar’s decline. Goldman Sachs research indicates that dollar depreciation directly stimulates capital inflows into emerging market bonds and equities, with currencies like the Brazilian real leading global gains.

Double-Edged Sword: Rising Commodity Prices Fuel Inflation Concerns

While a weaker dollar boosts risk assets, it also brings notable side effects. Oil prices have risen over 10%, and commodities generally strengthen, heightening global inflation expectations. If US stocks remain overheated, volatility in high-beta assets could further amplify, and investors may face dual pressures of liquidity and volatility.

A Reuters poll suggests that if December CPI and employment data unexpectedly come in strong (similar to the September non-farm payroll increase of 119,000), intra-Fed disagreements could shift toward a hawkish stance, pushing the dollar index back to 100 and triggering adjustments in risk assets.

Investment Strategy: Diversify to Manage Uncertainty

Although the short-term trend is dominated by dollar weakness, the long-term outlook depends on the depth of economic slowdown and the trajectory of the US inflation index. Analysts recommend investors:

Adopt a diversified allocation strategy, increasing holdings in non-US currencies and gold to hedge against dollar depreciation risks. Avoid excessive leverage and single-sided bets, as key economic data could reverse expectations. Also, monitor US fiscal deficits and government policy changes, which may temporarily support safe-haven demand for the dollar.

Currently, the market is in a critical period of monetary policy reassessment, with US inflation and employment reports being key triggers for dollar movements. Investors should closely follow related data releases.