Federal rate hikes spread to the market: Can the dollar's depreciation trend be reversed? Easing policy expectations dominate pricing

Loose expectations are permeating the financial markets, and the US dollar is facing multiple pressures. The Federal Reserve’s (Fed) recent dovish stance has prompted investors to reassess the direction of monetary policy, leading to adjustments in global capital allocation. The US dollar index (DXY) has come under technical pressure, touching a low of 98.313 yesterday, with a cumulative depreciation of over 9.38% this year. Behind this wave of dollar weakness, there is not only a reflection of changing policy expectations but also a deeper shift in global asset pricing.

Policy Shift Triggers Market Reassessment Wave

The signals released by Federal Reserve Chair Jerome Powell after the December meeting directly overturned previous hawkish market expectations. While a 25 basis point rate cut to the 3.50%-3.75% range was expected this week, Powell hinted that the January meeting might pause further rate cuts, emphasizing that “we have cut rates by 175 basis points and are in the neutral rate range,” which contrasts with market pricing.

More importantly, the Fed’s newly released dot plot maintains the median expectation of only one rate cut in 2025, diverging sharply from the market’s widespread pricing of two cuts (about 50 basis points). UBS FX strategist Vassili Serebriakov pointed out that this expectation gap will continue to suppress the dollar, especially as major global central banks (Australia, Canada, European Central Bank) are turning hawkish, making the Fed’s relatively dovish stance more prominent.

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 traditional safe-haven role and accelerating the spread of easing expectations in the market.

Dollar Depreciation Impacts Global Asset Repricing

The ripple effects of dollar weakness are clearly visible across various assets. Technology stocks and high-beta growth stocks are direct beneficiaries—the S&P 500 technology sector has gained over 20% this year. JPMorgan analysis shows that for every 1% depreciation of the dollar, tech earnings could increase by 5 basis points, which is especially favorable for multinational companies by improving their overseas revenue translation effects.

Gold markets reacted most intensely. As a traditional safe-haven asset, gold has surged 47% this year, breaking through $4,200 per ounce to hit a record high. Data from the World Gold Council shows global central banks have purchased over 1,000 tons (led by China and India), ETF inflows have surged, and the dollar’s weakness has amplified investors’ demand for inflation hedging.

Emerging markets have become the biggest winners. The MSCI Emerging Markets Index has risen 23% this year, benefiting from strong corporate earnings and the decline of the dollar in markets like South Korea and South Africa. Goldman Sachs research indicates that dollar weakness has stimulated capital inflows into emerging market bonds and equities, with currencies like the Brazilian real leading global gains.

However, this rally in risk assets also raises concerns. Dollar depreciation has pushed up commodity prices (oil up 10%), intensifying inflation expectations; if US stocks overheat, volatility in high-beta assets could further increase. A Reuters poll shows that 73% of 45 analysts expect the dollar to weaken further by year-end, but if December CPI data (expected to be released on December 18) remains strong, the DXY could rebound to the 100 level.

Can the Dollar’s Weakness Continue? The Key Lies in Economic Data

Although short-term weakness dominates, the dollar is not on a one-way downward trajectory. Its future direction depends on upcoming employment and inflation data. If December CPI and non-farm payrolls come in strongly (e.g., November non-farm payrolls unexpectedly increase by 119,000), internal Fed disagreements (three members opposed rate cuts this time) could turn hawkish, pushing the DXY back to the 100 level.

J.P. Morgan economist Mohit Kumar believes there is a 50/50 chance of a rate cut in January, with employment data becoming a key variable. The market is overreacting to labor market signals. Additionally, the widening US fiscal deficit and government shutdown concerns (already ongoing since November) could temporarily support the dollar’s safe-haven demand.

Analysts emphasize that the current market is at a critical point of monetary policy reassessment. The probability of a weaker dollar in the short term is higher, but the long-term trend depends on the depth of the global economic slowdown. Investors are advised to diversify into non-US currencies and gold assets, avoid excessive leverage, and remain flexible to potential volatility during the spread of easing expectations.