This year, the US Dollar Index has made a second attempt to appreciate and break through the 100 mark. This round of the breakout in the US Dollar Index will be relatively more “successful” compared to July — the rebound may reach higher levels (101 to 103), and last longer. At the very least, it will require consecutively weak hard economic data following the reopening of the US government to adjust market expectations.
According to Zhitong Finance APP, Minsheng Securities published a research report stating that this year marks the second attempt by the US dollar index to appreciate and break through 100. This round of the dollar index's breakthrough will be relatively more "successful" compared to July — the rebound level may be higher (101 to 103), and its duration longer. At least until the US government reopens, a series of weaker economic hard data will be required to adjust market expectations. However, Minsheng Securities does not believe that the appreciation cycle of the dollar is imminent; currently, it is more of a rebound. In the short term, the market has already started pricing in the scenario where there will be no interest rate cut in December (expected probability now exceeds 30%), leaving significant room for subsequent adjustments in policy expectations.
The main viewpoints of Minsheng Securities are as follows:
This is the second attempt this year for the US dollar index to appreciate and break through 100. The last attempt occurred at the end of July, but then sharply declined due to the significantly lower-than-expected non-farm payroll data released on August 1, followed by a second bottoming out. So, what differences will emerge this time around with the US government shutdown and without the interference of US data? Notably, today’s market volatility was substantial, which cannot be entirely attributed to a strong dollar, but the dollar breaking above 100 indeed serves as an important warning signal.
Let us first examine what the differences are?
Firstly, both instances share the influence of TACO and the unwinding of easing expectations, but the macroeconomic environments differ significantly. The economic data released in July, particularly consumption figures that exceeded expectations, reflected a phase of rebound in the US economy following the initial tariff shock, leading the market to shift its expectations from a prior "recession" mode to a "recovery" outlook.
In contrast, the current market resembles an "autopilot" state amid the absence of economic data. While concerns persist over Powell’s hawkish remarks, the lack of official data makes it difficult to counter these fears.
Secondly, the external drivers differ. Among the G7 currencies in July, the pound sterling suffered the largest decline against the US dollar: persistent economic weakness and dire fiscal conditions made it the weakest link.
In this round, however, the Japanese yen is leading the decline, with Japan's domestic political and economic situation playing a significant role: on one hand, new Prime Minister Sanae Takaichi has inherited the loose monetary policy of 'Abenomics,' and on the other hand, due to being overly 'friendly' towards the United States, the trade agreement reached between Japan and the US has instead placed Japan at a more disadvantageous position compared to China and South Korea.
So, will the outcome be different this time?
We tend to believe that this breakout of the US Dollar Index relative to July will be more 'successful' – the rebound may reach higher levels (101 to 103), and last longer, requiring at least the US government to reopen and release consecutive weak hard economic data to adjust market expectations.
However, we do not think the appreciation cycle of the US dollar is about to begin; currently, the US dollar is merely experiencing a rebound.
In the short term, the market has already started pricing in no rate cut in December (expected probability has exceeded 30%), which leaves substantial room for subsequent adjustments in policy expectations.
Additionally, before the end of the year, the White House will announce the nominee for the chair of the Federal Reserve. Judging from the popular candidates, the policy differences only lie between 'loose' and 'extremely loose,' both of which are expected to be unwelcome news for the US dollar.
In the medium to long term, the Federal Reserve remains in a rate-cutting cycle (and the more hesitant it is now, the more likely it is to accelerate rate cuts subsequently); meanwhile, the issues of U.S. debt and fiscal stimulus in Europe are well-worn logical arguments.
More importantly, if the dollar embarks on an upward trajectory, the underlying implication is that Trump 2.0's policy framework is successful and the U.S. economy and society will smoothly emerge from their predicament. However, the reality is that the scale of U.S. debt continues to reach new historical highs, and many of Trump's current domestic and foreign policies are driven by short-term interests rather than addressing long-term structural issues. If this is considered success, then one can only say that the shift in market pricing paradigms has taken too large a step.
From an asset perspective, the key difference between the current market and the previous one is that prices of many assets (especially risk assets) have risen significantly after fermenting in September and October, which will amplify the 'side effects' brought by a rebound in the dollar—potentially helping gold and silver find their bottoms and assisting the equity market in digesting relatively high valuations.