After a 2022 Fed rate hike pushed the dollar to a 20-year high, the dollar has remained largely range-bound this year on strong U.S. economic growth and the Fed’s pledge to keep borrowing costs rising.

Last week’s Fed meeting marked an unexpected U-turn, with Chairman Jerome Powell saying the historic tightening of monetary policy that raised interest rates to the highest level in decades could end as inflation recedes. The market currently generally expects a 75 basis point interest rate cut next year.

Rate cuts are generally considered a headwind for the dollar, making U.S. dollar assets less attractive to yield-seeking investors. While strategists expect the dollar to weaken next year, a faster pace of rate cuts could accelerate the greenback’s decline.

However, betting on a weaker dollar has been a risky business in recent years, and some investors are wary of placing a bet too early. The outperforming U.S. economy could be a factor holding back bearish investors.

Kit Juckes, chief foreign exchange strategist at Societe Generale, said that the Federal Reserve’s aggressive monetary tightening and post-epidemic policies have promoted the growth of the U.S. economy, “fueled the idea of ​​American exceptionalism and brought about the strongest economic growth since the 1980s.” Big dollar rally.” “Some of these gains should be reversed” as the Fed prepares to ease policy, he said.

The dollar is expected to fall 1% this year against a basket of peer currencies.

The dollar’s movements are important to analysts and investors because of its central role in global finance.

For the United States, a weaker dollar would make U.S. exports more competitive abroad and boost profits for multinational corporations by making foreign profits cheaper to convert into dollars. About a quarter of S&P 500 companies generate more than 50% of revenue, according to FactSet data.

Independent trader Slimane Himora said that after 2020, the Federal Reserve adopted a very loose monetary policy to stimulate the post-epidemic economy, and its goal has been achieved, but in the face of the huge increase in money supply, Inflation problem, the Federal Reserve implemented a tightening monetary policy. The policy is designed to raise interest rates and shrink the Fed’s balance sheet by not renewing maturing bonds.

Since 2022, a completely different tune has been played, as markets have just witnessed one of the most rapid monetary tightenings in history. The consequences of this monetary tightening, such as the credit squeeze and its impact on economic activity, have prompted the Fed to take a more dovish approach so as not to harm the country’s economic health.

Through these different interest rate movements, the market also observed a positive correlation between the 10-year bond yield and the price of gold. In other words, falling interest rates are particularly good for gold. This trend will continue as the market expects multiple rate cuts between now and 2025. The pricing makes sense, because there is no need for the Fed to raise interest rates at the moment. What is needed is to see the rate hikes transmitted to the real economy, which takes an average of 12 to 18 months.

Central banks have significantly increased their gold reserves this year. According to the World Gold Council (WGC), following a cumulative purchase of 175 tons in the second quarter, countries purchased 337 tons in the third quarter of 2023. This amount exceeded the initial estimate of 103 tons.

The large-scale gold acquisitions were led by China, Poland, Singapore and undisclosed purchases, bringing total purchases in the first nine months of this year to 800 tons.

This buying frenzy not only supported gold prices that recently topped $2,000 an ounce, but also helped offset investor selling during a global monetary tightening.

Why do central banks buy gold? Slimane explained: “Central banks around the world are turning to gold to strengthen and safeguard their financial reserves, a strategy aimed at diversifying their assets and reducing their reliance on traditional currencies, which are unfortunately prone to volatility and inflation. Inflated. Considered a safe haven in times of economic uncertainty, physical gold is uniquely stable due to its intrinsic value and its history as a store of value dating back thousands of years.”

“Gold’s growing popularity reflects people’s pursuit of financial security and the desire to hedge against global economic uncertainty,” he continued.