The weakening of the US dollar drives a major shift in global assets: How does the interest rate cut cycle affect your investment portfolio?

The dovish policies of the Federal Reserve (Fed) are rewriting the global financial landscape. The US Dollar Index (DXY) continues to weaken, touching a low of 98.313 yesterday, depreciating over 9.38% this year. This is not just currency fluctuation but also signifies a profound adjustment in investors’ capital allocation. When the dollar softens, tech stocks, gold, and emerging markets take turns rising, and this volatility is also affecting the TWD’s relative position in the 50-year historical exchange rate.

Policy Shift Behind the Dollar’s Weakness

On December 10, the Fed unexpectedly adopted an easing stance, lowering interest rates to a range of 3.50%-3.75%. More importantly, Chair Jerome Powell signaled at the press conference that the January meeting might pause rate cuts, but the new dot plot still maintains expectations of only one rate cut in 2025. This sharply contrasts with the market’s prior pricing of two rate cuts (about 50 bps), prompting investors to front-run their positioning.

UBS foreign exchange strategists note that the Fed appears relatively dovish, while the Reserve Bank of Australia, Bank of Canada, and European Central Bank are adjusting policies in the opposite direction. In this environment of diverging central bank policies, the dollar is losing its appeal. Additionally, since December 12, the Fed has initiated a liquidity plan to purchase $40 billion of short-term government bonds, further diminishing the dollar’s safe-haven aura.

Asset Rotation Triggered by Dollar Weakness

Support for Tech Stocks and Growth Stocks

The dollar’s depreciation improves US corporate export competitiveness. JPMorgan analysis shows that for every 1% decline in the dollar, tech earnings can increase by 5 basis points. The S&P 500 tech sector has gained over 20% this year, benefiting multinational companies the most. Even large tech firms like Oracle, despite facing earnings pressure, find rebound support in the weak dollar environment.

Gold Hits Record Highs

Gold is the direct beneficiary, with a year-to-date increase of 47%, breaking through $4,200 per ounce. Data from the World Gold Council shows central banks (led by China and India) purchased over 1,000 tons, while ETF inflows surged. The weakening dollar amplifies investors’ demand for inflation hedging.

Explosive Growth in Emerging Markets

The MSCI Emerging Markets Index rose 23% this year, with South Korea, South Africa, and other markets performing strongly. Goldman Sachs research indicates that the dollar’s weakness directly drives capital flows into emerging market bonds and equities, with currencies like the Brazilian real leading gains. This trend is also reflected in the TWD’s long-term exchange rate movement over the past 50 years, with the New Taiwan dollar showing upward pressure against the dollar.

Turning Points and Risks of Reversal

However, this dollar weakness is not a permanent one-way decline. A Reuters poll shows that 73% of analysts expect the dollar to weaken further by year-end, but if the December CPI data shows strong numbers, the dollar index could rebound to the 100 level.

Jefferies economist Mohit Kumar points out that the probability of a rate cut at the December meeting is now nearly 50/50, with employment data being the key. If non-farm payrolls unexpectedly grow (e.g., 119,000 in September), Fed officials may turn hawkish, triggering a dollar rebound.

Furthermore, the US fiscal deficit widening and government shutdown fears still exist. These factors could temporarily support safe-haven demand for the dollar, disrupting the current market expectation of a one-way decline.

How Investors Should Respond

In the short term, the dollar’s weakening trend remains dominant, but the long-term direction depends on the extent of economic slowdown and subsequent Fed policy adjustments. Analysts recommend adopting a diversified allocation strategy: increasing holdings in non-US currencies and gold, avoiding excessive leverage, and closely monitoring upcoming employment and inflation data. Every fluctuation in the dollar index is reshaping the global asset allocation landscape.