The dollar fluctuated! US stocks, gold, emerging market opportunities

this $USD (USDindex.FX)$ Wednesday fell to a new low in nearly five months as data showing that inflation is slowing raised hopes that the Federal Reserve might slow down interest rate hikes. The decline in the US dollar index was the biggest since September 2010, when it fell 5.39%.

Technically, the US dollar index has lost its key position on the important 200 DMA. If it doesn't quickly return above the 200 DMA, it could decline further.

1. Why the US dollar $USD (USDindex.FX)$ Depraved recently?
The US dollar index weakened sharply as the better-than-expected CPI report in November raised hopes that the Federal Reserve will soon slow down the pace of interest rate hikes.

On Tuesday, Federal Reserve Chairman Powell sent a dovish signal to raise interest rates. On Thursday, another recent inflation data (PCE) further supported bets that the US dollar and US bond yields will continue to fall.

Meanwhile, yields on US bonds of all maturities weakened again on Thursday, the latest sign that the market is changing expectations about the Federal Reserve's rate hike path.

Until then $USD (USDindex.FX)$ Driven by the crazy rate hike in 2022, it soared from around 95 to 114.79 at the end of September, a new high since 2002, with the biggest increase of nearly 20% in 2022.

From Bloomberg

Note: On November 3, the Federal Reserve announced an interest rate hike of 75 basis points to 3.75%-4.00%. This is the sixth consecutive rate hike this year. Interest rates were raised cumulatively by 375 basis points in 2022, and the interest rate range of 3.75%-4.00% also hit a new high since 2008. The next declaration of interest resolution is December 14.

2. Has the dollar peaked?
Simply put, the trend of the US dollar is bound to be affected by the strength of the US economy, GDP growth, and monetary policy

In the short term, economists and current strategies at UBS, Bank of America, and other institutions believe that there is room for the dollar to rise, but it is unlikely to maintain its existing gains. UBS senior economist Brian Rose: “We do see some possibility that the dollar will recover its losses in the short term.”

In the long run, according to historical statistics, the weakness of the US economy is often the main indicator of the weakening of the US dollar. Choice data shows that since 2000, the US quarterly GDP growth rate fell below 0 in 2008 and 2020, respectively, and the growth rate returned to normal in 2010 and 2021, while the US dollar index also ushered in strong long-term appreciation after the GDP rebound. In 2004, the US gross domestic product began to decline for four consecutive years. During this period, the US dollar index fell all the way to nearly 70 points.

Therefore, when interest rate hikes seriously affect the economy and the economy weakens, the Federal Reserve continues its hawkish monetary policy, funds flow out of dollar assets, and then the strong dollar cycle may end.

3. What is the impact on capital markets When will the US dollar fall?
A. Non-US currencies will appreciate
The Federal Reserve continues to raise interest rates, and the US dollar exchange rate continues to strengthen. Coupled with Russia-Ukraine conflict, import inflation, supply chain risks, and debt concerns,

The euro's exchange rate against the US dollar came under pressure and fell below parity for the first time since 2002. The Bank of Japan will carry out the pigeon school to the end,Dragging down the yen's continued depreciation, and the dollar rose to 24 years against the yenA new high.National currencies have repeatedly created new historical values.

So far, the euro has depreciated nearly 10% against the US dollar, the offshore renminbi and British pound depreciated more than 10% against the US dollar, and the yen depreciated nearly 20% against the US dollar. At one point, it depreciated by nearly 30%.

However, since November, as US CPI data fell short of market expectations, the market began a wave of tightening and declining trading. This $USD Index (USDIndex.forex) $ has fallen back to 104, and the exchange rates of various countries have begun a wave of appreciation against the US dollar.

B. The US stock market may rebound
Crazy rate hikes dominate the global market in 2022. Inflation was high, the dollar index soared, and major global stock markets fell sharply.

Since the beginning of the year, as of September 28, the US dollar peaked, and all major global stock markets have declined. Russia's RTS index fell by 32.66%, while Russia $Nasdaq Composite Index (.IXIC.US)$ ， $Hang Seng Index (800000.HK)$ The German DAX index fell more than 20%.

The trend of the US dollar this year is negatively correlated with the trend of the US stock market. When the US dollar falls, the US stock market will rebound accordingly.

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Analyst Widmer also pointed out that gold and silver may face challenges in the first half of next year, so precious metals investors need to be patient.

Investment demand is the biggest factor affecting the short-term trend of gold prices. The current macroeconomic environment discourages investors from holding gold. According to the data, the level of non-commercial interest is already about half of the 2020 bull market level.
According to Bank of America's official forecast, the price of gold may still rise steadily to $2,000 per ounce by the end of 2023. By 2024, the price of gold is expected to reach 2086 US dollars/ounce. $Gold Futures(DEC4) (GCmain.US)$
Bank of America is also bullish on silver. The silver price is expected to rise to $25 per ounce in the third quarter of next year and will remain the same until 2024. $Silver Futures(DEC4) (SImain.US)$
D. Emerging markets welcome opportunities
Since this year, as the US dollar has appreciated, many central banks in emerging markets have raised interest rates simultaneously to avoid the continued weakening of the local currency and the flight of foreign capital.

According to market analysis, emerging market countries are expected to benefit when the dollar begins to weaken. Coupled with the cooling of concerns about the Asian epidemic, related markets will be boosted.

The weak dollar index provided an additional tailwind for foreign fixed income — particularly emerging market debt.

Recently, emerging market bonds have rebounded sharply from October lows, but gains may be limited

Stock J.P. Morgan US Dollar Emerging Markets Bond ETF $iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB.US)$ Including dividends, it rose 7%. The weak dollar index provided an additional tailwind for foreign fixed income — particularly emerging market debt.

Prior to that, the global impact of oil and food prices and a strong dollar further dragged down emerging markets. Emerging market stocks are currently in one of the longest bear markets, with the Morgan Stanley Capital International Emerging Markets Index falling about 40% from its peak in February 2021.