Dovish sentiment spreads across global markets: US Dollar Index hits yearly lows, who will be the next winner?

The US dollar has taken a sharp turn downward. After the Federal Reserve (Fed) signaled a dovish shift on December 10, the US Dollar Index (DXY) hit a low of 98.313, down more than 9.38% year-to-date. This shift in monetary policy expectations is spreading across global capital markets, reshaping investors’ asset allocation logic.

How does the Fed’s “Dovish Turn” Impact the US Dollar?

This week, the Fed cut interest rates by 25 basis points to a range of 3.50%-3.75%, which was expected. However, the subtle change in Chairman Powell’s language is the market’s focus — he hinted that rate cuts might pause in January but emphasized, “We have already cut rates by 175 basis points and are within the neutral rate range.”

The contradiction lies in the Fed’s new dot plot, which expects only one rate cut in 2025, contrasting sharply with market pricing of about two cuts (around 50 bps). UBS FX strategist Vassili Serebriakov pointed out the key: “The market initially expected a more hawkish stance, but the Fed has been relatively dovish, contrasting with the hawkish shifts by the Reserve Bank of Australia, Bank of Canada, and European Central Bank.”

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. These policy signals are reaching forex traders, directly pushing up the euro, pound, and Swiss franc.

Capital Reallocation Driven by a Weakening Dollar

As the US dollar index declines, risk assets become the target of capital flows.

Tech stocks and high-beta growth stocks gain support: The S&P 500 tech sector has risen over 20% this year. According to JPMorgan analysis, a 1% depreciation of the dollar can increase tech earnings by 5 basis points, which is especially beneficial for multinational companies relying on international sales. A weaker dollar directly enhances export competitiveness and lowers corporate borrowing costs.

Gold surges to a record high: Year-to-date, gold has gained 47%, surpassing $4,200 per ounce. Data from the World Gold Council shows central banks have purchased over 1,000 tons (led by China and India), and ETF inflows are also surging. The dollar’s softness makes gold more attractive as an inflation hedge.

Emerging markets are the biggest winners: The MSCI Emerging Markets Index has risen 23% this year, benefiting markets like South Korea and South Africa. Goldman Sachs research indicates a large influx of capital into emerging market bonds and equities, with currencies like the Brazilian real leading the rally.

The Double-Edged Market Effect

However, a weaker dollar also triggers risk chains. Commodity prices are rising — crude oil has increased 10% this year — intensifying inflation expectations. If US stocks become overly hot, high-beta assets will also see amplified volatility.

According to a Reuters poll, 73% of analysts expect the dollar to weaken further by year-end, assuming no unexpected economic data. If December CPI data (expected to be released on December 18) comes in strong, the DXY could rebound to the 100 level.

When Will the Dollar Stop Falling? The Key Lies in Employment and Prices

In the short term, the dollar remains relatively weak, but the decline is not endless. If December CPI and employment data are strong, internal divisions within the Fed (already three members opposed to rate cuts at this meeting) could shift to a hawkish stance, pushing the DXY higher. Jefferies economist Mohit Kumar warned: “The probability of a December meeting is now 50/50; employment data will determine the direction, and markets may overreact to labor market signals.”

Additionally, the US fiscal deficit expansion and government shutdown concerns are likely to temporarily support the dollar’s safe-haven demand.

Analysts suggest investors should recognize that the market is in a phase of monetary policy reevaluation. The probability of a weaker dollar in the short term is higher, but the long-term trend will depend on the depth of economic slowdown. Diversifying into non-US currencies and gold, avoiding excessive leverage exposure, is the correct strategy to navigate volatility.