## Will the Fed's Rate Cut and Dovish Stance Trigger a Global Capital Reallocation? Can the Dollar Stop Its Decline?

After the Fed's December decision, the US Dollar Index (DXY) fell to 98.313, down more than 9% year-to-date. Behind this dollar weakness, there is both a reflection of the shift in monetary policy and a driver of global asset re-pricing. The key question for investors is: Is the dollar's weakness a temporary correction, or will it evolve into a longer-term trend?

## Policy Signal Divergence Sparks Market Repositioning

This week, the Fed announced a 25 bps rate cut to a 3.50%-3.75% range, but Chairman Powell's signals differed from market expectations. While officials indicated that the January meeting might pause rate cuts, the new dot plot maintained the median expectation of only one rate cut in 2025, contrasting sharply with the market pricing of two cuts. This ambiguity in policy communication is a primary reason for the dollar's under pressure.

More notably, the Fed announced it would purchase $40 billion in short-term government bonds starting December 12 to inject liquidity. This move is dovish in tone and directly weakens the dollar's safe-haven appeal. Meanwhile, the relatively hawkish policy shifts by the Reserve Bank of Australia, Bank of Canada, and European Central Bank further highlight the Fed's relative easing, continuing to exert downward pressure on the dollar exchange rate.

## Capital Flows Reshape the Global Asset Landscape

The most immediate impact of dollar weakness is the revaluation of risk assets. US tech stocks have gained over 20% this year, driven not only by improved corporate fundamentals but also by the weaker dollar boosting export competitiveness and lowering borrowing costs for multinational companies. JPMorgan estimates that a 1% decline in the dollar can increase tech earnings by about 5 basis points.

Gold has been the biggest beneficiary of this rally, with a 47% increase this year, surpassing $4,200 per ounce and hitting a record high. Central banks are purchasing gold at unprecedented levels (led by China and India, over 1,000 tons), and ETF inflows continue to grow, further catalyzed by dollar weakness and inflation hedging demand.

Emerging markets are also a key area of capital inflows. The MSCI Emerging Markets Index has risen 23% this year, with standout performances from South Korea, South Africa, and others. Notably, emerging market currencies such as the Brazilian real and Indian rupee have appreciated, while Asian currencies like the 900 Yen have benefited from dollar softness and valuation recovery. Goldman Sachs research indicates that dollar weakness is driving large capital inflows into emerging market bonds and equities.

## Double-Edged Effects and Potential Risks

This reallocation of capital does not come without costs. Dollar weakness has pushed up commodity prices (oil up 10%), which in turn heightens global inflation expectations; if US stocks overheat, volatility in high-beta assets could increase. A Reuters poll shows that 73% of 45 analysts expect the dollar to weaken further by year-end, but if this consensus is broken, a rapid reversal could occur.

If December CPI data (expected to be released on the 18th) exceeds expectations or employment reports surprise positively, internal Fed divisions (already three dissenters against rate cuts at this meeting) could shift, pushing the DXY back toward the 100 level. Jefferies economists note that the probability of a rate cut at the January meeting is actually 50/50, and markets may be overreacting to labor market signals.

## Strategies and Outlook

In the context of monetary policy reevaluation, the short-term probability of further dollar weakening is relatively high, but the long-term trend ultimately depends on the depth of economic slowdown. Strong economic data could rewrite market expectations, and the dollar might regain its safe-haven status. Investors should consider diversifying into non-US currencies and gold assets, while avoiding excessive leverage to hedge against potential volatility reversals.