With the Federal Reserve's interest rate cut in September, most market institutions believe that the U.S. dollar will weaken due to narrowing interest rate differentials and the continuous expansion of the U.S. federal government’s debt. Since September, related "devaluation trades" have become popular. The core of a "devaluation trade" is to hedge against the decline in fiat currency purchasing power. It refers to investors moving funds out of dollar-denominated assets and into assets believed to better preserve value, such as gold, stocks, and cryptocurrencies, when the market expects a currency (especially the U.S. dollar) to weaken. This logic seems to explain the recent rebound in U.S. stock prices, as well as the continued rise in the prices of gold, silver, and crypto assets. Currently, gold prices have exceeded USD 4,000 per ounce, and Bitcoin prices have at one point surpassed USD 120,000 per coin.
However, in the case of the U.S. dollar, despite the widely anticipated rate cut by the Fed in September, the dollar index did not continue to decline. Instead, it rebounded from a low of 96.22 on September 26 to 99.20 by October 9. This actually confirms the earlier judgment of a senior researcher at ANBOUND, who suggested that the global geopolitical landscape suggests the U.S. dollar’s status remains relatively stable, and that it would be overly optimistic to expect significant dollar depreciation. The "currency wars" among sovereign currencies still face multiple tests from policy expectations and geopolitical competition.
At present, although most market institutions expect the dollar to weaken, most capital has not left the U.S. financial markets. Rather, there has been more of a structural shift—for example, from the high-valuation stock market to the bond market. Looking at the bond market, long-term U.S. Treasury yields have remained largely stable. Even after entering October, when the U.S. government shut down due to budget issues, U.S. Treasuries actually stabilized. This also contradicts the “devaluation trade” assumption that fiscal and monetary expansion in the U.S. would lead to rising inflation. Amid these developments, the offshore RMB/USD exchange rate has returned to around 7.13, close to the level before the Fed's rate cut and consistent with ANBOUND researchers’ forecasts for the RMB exchange rate.
From the perspective of researchers at ANBOUND, the unusual movements of the U.S. dollar signal the growing complexity of exchange rate issues amid changes in the global trade and monetary environment. Firstly, although the Fed cut interest rates in September, it still remains concerned about the difficult balance between inflation and employment. This suggests that the pace of rate cuts may not be as aggressive as President Trump had anticipated. While the U.S. dollar has entered a downward cycle, the decline has been limited, showing that the dollar still has considerable resilience. Secondly, although the U.S. government has struggled to reduce the fiscal deficit, leading to rising federal debt and intensifying political disputes that even caused a government shutdown, the debt ceiling issue appears more like a political standoff. Investors in the capital markets have not lost confidence in U.S. creditworthiness.
Some market analysts believe that the divergence between gold and U.S. Treasury trends may reflect deeper disagreements among investors regarding the U.S. economic outlook. On one hand, signs of a slowing labor market have led some to worry about the economy and view the Fed’s preemptive rate cuts as justified. On the other hand, strong economic growth data and signs of rising inflation have raised concerns among others that rate cuts could further fuel inflation in the future. This divergence highlights the very issues the Fed remains concerned about, and that these issues are still unfolding.
By comparison, countries such as Germany and France in Europe, as well as Japan, are also facing government debt issues, and the situation for the euro and yen is not necessarily better than that of the U.S. With recent political developments in France and Japan in October, their debt problems have worsened, which is part of the backdrop and reason behind the recent relative strength of the U.S. dollar. Although investors do not have strong confidence in the U.S. economy, they also lack conviction in other major currencies like the euro and yen. The Japanese yen, once considered a safe-haven currency, is now more concerning due to high inflation and the heavy debts of the Japanese government. These dynamic shifts in global monetary and political landscapes are factors that cannot be ignored in the changing logic of the dollar’s movement.
The latest development is that U.S. President Trump has once again announced a 100% tariff on Chinese goods, in retaliation for China's tightening control over rare earth exports. This has led to a renewed escalation of the U.S.-China trade dispute, shaking the markets. The U.S. side has since softened its stance somewhat, and further negotiations between the two sides are expected. However, according ANBOUND’s founder Kung Chan, these ups and downs indicate that the U.S.-China rivalry has already gone beyond trade disputes and entered a stage of strategic competition. This will inevitably impact the global economy, and the U.S. dollar will not be immune. The market’s response to this shift has been a sharp decline in the U.S. dollar, U.S. equities, and crypto assets, while gold, silver, and U.S. Treasuries have strengthened. This change in market logic clearly goes beyond the framework of a typical "devaluation trade". Notably, similar to when the U.S. imposed reciprocal tariffs back in April, the renewed escalation of the U.S.-China "trade war" has not boosted the dollar as it once did. In fact, it has led to a weakening of the dollar.
From the perspective of market investors, these changes ultimately stem from the impact of such shocks on the U.S. economy. The weakening of the U.S. dollar is not only due to trade factors, but more importantly, reflects expectations that the fundamentals of the U.S. economy are being affected. On one hand, a weakening economy could lead to cooling inflation, which would accelerate the pace of Fed rate cuts and drive U.S. Treasury bonds higher. On the other hand, rising geopolitical risks have prompted some capital to retreat from risk assets, either moving into traditional safe-haven assets like precious metals or into U.S. Treasuries in exchange for low-risk returns. It is also worth considering the volatility in crypto asset prices. Despite their sharp rise during periods of monetary easing, crypto assets, especially under increasing dollarization pressures, still cannot compete with traditional geopolitical hedges like gold. In other words, while market skepticism toward the dollar is indeed growing, prompting a shift to diversified safe-haven markets such as gold and silver, investors are avoiding previously popular crypto assets. This is because these assets are still priced in U.S. dollars and therefore cannot effectively hedge against dollar-related risks. At the same time, investors still struggle to find alternative currencies to diversify their risk. Although some capital has flowed into China, Europe, and Japan, the majority still prefers to hold lower-risk U.S. bonds.
Therefore, the changes in the U.S. dollar are more heavily influenced by the fundamentals of the U.S. economy than by previously emphasized factors such as inflation and debt. As researchers at ANBOUND have previously noted, even under Trump’s “conservative” policies, the depth and stability of the U.S. market remain more attractive compared to emerging markets or those in Europe and Japan.
In this era of de-globalization, it is still too early to conclude that the U.S. dollar will weaken, as the rise in various risk factors is making global capital flows more cautious and increasingly inclined toward forming more regionalized market structures. Of course, this evolution is a long-term process. Although investors are increasingly concerned about the politicization of the Fed and the stability of the dollar, in the short term, the world has yet to find a sovereign currency capable of replacing the U.S. dollar.
Final analysis conclusion:
The U.S. government shutdown, along with the earlier Fed rate cuts, has made "devaluation trades" popular in the market. Some investors believe that rising U.S. debt and accelerating inflation will weaken the dollar, which has driven recent notable increases in U.S. stocks, gold, and crypto assets. However, the worsening U.S.-China trade war and shifts in the dollar’s fundamental factors suggest that any weakening of the dollar is rooted in structural changes in the U.S. economy. As things stand, the dollar still retains stability and an irreplaceable resilience.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
