ATFX FX market: In 2023, the Federal Reserve will raise interest rates by 25 basis points each time, with a cumulative rate hike of one percentage point. In the same year, the U.S. dollar index **204%, with a minimum of 9955, breaking through the 100 mark. Why does the dollar index fall instead of rising in 2023, when the Fed is raising interest rates intensively? The answer: interest rate cut expectations. Market participants believe that the higher the interest rate, the greater the likelihood of a recession, so after each Fed rate hike, the dollar index briefly strengthens, and after a while, it falls sharply due to the surging pessimism of a "hard landing". In just a month and a half of 2024, the cumulative increase in the dollar index has reached 264%, erasing the decline for the whole of last year. Why don't rate cut expectations work in 2024? We believe there are several reasons for this:
First, there is no sign of a "hard landing" in US economic data. Last year's "hard landing" was only expected to exist, and the actual economic data in the United States was very healthy, even in January this year, the performance was still exceptional. For example, the annual rate of CPI growth rate is 31%, close to the moderate inflation standard of 2%, hyperinflation has basically been eliminated; Unemployment rate 37%, well below the basic standard of 5%, and the labor market demand is strong; GDP grew at a quarter-on-quarter rate of 33%, much higher than the growth rate of European countries in the same period. No matter how you look at it, the U.S. macro economy is a picture of recovery. As for the issue of the high benchmark interest rate, it is uncertain whether it is a policy that needs to be corrected until inflation in the United States falls below a reasonable level. In addition, the judgment that "the higher the interest rate, the greater the likelihood of a recession" is inherently flawed, because interest rates are only one of the many factors that affect a recession, and it is not the most important. Focusing only on interest rates and ignoring other indicators often leads to unreliable conclusions.
Second, the high-interest US dollar has attracted a large amount of international travel funds. Money always flows in the direction of high interest rates. The Federal Reserve's Fed interest rate is already as high as 55%, and the yield on one-year Treasury bonds has also reached 498%。In the U.S. currency** market, higher yielding products abound and are less risky. In comparison, except for developing countries such as India, Russia, and Brazil, the interest rate returns of the US dollar are among the highest. The high interest rate characteristics have attracted a large amount of international travel capital into the United States, and the US dollar index has naturally risen. Even if there is an expectation of interest rate cuts, as long as the benchmark interest rate is still at a high level, it will not affect international travel funds chasing high interest rates.
Third, from a technical point of view, the U.S. dollar index is still in a high range.
The chart above shows the monthly chart of the U.S. dollar index. According to the 100 integer mark is the watershed of the strength of the dollar index, the market price of the dollar index is still in a strong range. Moreover, since 2018, the US dollar index has been operating inside the ascending channel in the chart, and the long-term trend is still bullish. Even if the "rate cut expectations" lead to a negative trend for the U.S. dollar index in 2023, the decline is very limited and not enough to disrupt the long-term structure of the U.S. index.
To sum up, we believe that the U.S. dollar index based on "interest rate cut expectations" is destined to be full of twists and turns, during which there will be many U.S. index large**, and traders betting on the U.S. index** need to be vigilant about this.
ATFX Risk Warning, Disclaimer, Special Statement: The market is risky, and investment should be cautious. The above content is the opinion of the analyst and does not constitute any operational advice. Please do not rely on this report as the sole reference. Analysts' views are subject to change at different times and will be updated without notice.