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in the past august, the us dollar index fell by 2.2%, the biggest drop since november last year, and hit the second lowest level in this round of us dollar rising cycle during the session.

the new round of dollar weakness is related to the market's expectation of a policy shift by the federal reserve. federal funds rate futures show that the federal reserve will cut interest rates by nearly 100 basis points this year. as a result, non-us currencies rebounded significantly. data from the us commodity futures trading commission (cftc) showed that the dollar short position rose to $9.8 billion last week, the highest since january.

us dollar (source: xinhua news agency)

the strong cycle of the us dollar is in jeopardy

after the fed started raising interest rates in march 2021, the us dollar index started a new bull market cycle and hit a high of 114.7 in september 2022. as prices peaked and fell, the us dollar index fell below the 100 mark in june 2023. then, disturbed by factors such as inflation stickiness and supply chain bottlenecks, the us dollar index started a range-bound oscillation mode. subsequently, in the second half of this year, stimulated by the month-on-month decline in inflation to zero, the fed gradually shifted its policy focus from prices to employment. the september rate cut pricing caused the us dollar to start a new round of diving, and it approached the 100 mark again last week.

in a report sent to the first financial reporter, the chief investment officer office (cio) of ubs wealth management predicted that this round of strong dollar trend has come to an end. first, the slowdown in us economic growth and consumer spending will weaken support for the dollar. the us economy remains strong, thanks to a strong fiscal stimulus plan, strong immigration and resilient consumer activity. however, the high level of savings rates of consumers after the epidemic has declined, and economic data show that consumer spending is slowing. the labor market is beginning to show signs of weakness, especially in industries that support post-epidemic job growth.

second, the u.s. interest rate advantage over the rest of the world will weaken. u.s. inflation had been high before, but is finally approaching its long-term target. in order to achieve its dual mission of curbing inflation and maintaining full employment, the fed needs to quickly relax its current restrictive interest rate level. falling u.s. nominal and real interest rates will weaken the u.s. yield advantage, thereby weakening support for the dollar.

finally, investors are turning their attention to structural challenges. structural issues like the us fiscal and trade twin deficits are often overlooked until market sentiment shifts. slowing gdp growth and falling yields may prompt investors to reassess the dollar's high valuations, as tight government fiscal conditions and balance of payments are not conducive to dollar strength. history shows that overvalued currencies are vulnerable to shocks when fundamentals change.

the fed's rate cut also relieved many central banks in developed economies. in early july, the yen exchange rate against the us dollar once fell below the 160 mark, falling to a 38-year low. the bank of japan's several interventions had limited effect under the pressure of us dollar buying. with the combined effects of the bank of japan's rate hike, the fed's upcoming rate cut, and the liquidation of popular carry trades, the yen exchange rate has rebounded by more than 10% from its low, temporarily escaping danger.

derek halpenny, head of emea global market research at mufg, said: "(after the rate cut) the dollar index is not expected to rebound as frequently as in the past two years. this is a fundamental turn, and usd/jpy is moving lower."

two years ago, the controversial policies of then-british prime minister truss caused the pound to fall to a historic low and the euro to fall to parity against the us dollar. the weakness of the local currency also increased the pressure on all parties to deal with inflation.

that has changed. the pound and the euro are the best performing major currencies this year. gbp/usd has risen above 1.30, up more than 25% since its all-time low, and eur/usd has reclaimed 1.12 last week, helped by markets pricing in lower rate cuts from the ecb and the bank of england than the fed.

today, the uk economy is growing strongly. the latest data released on monday showed that the final value of the uk manufacturing purchasing managers' index (pmi) in august rose from 52.1 in july to 52.5, the highest level since june 2022, and the same as the initial value in august. the market expects the bank of england to keep interest rates unchanged this month and then cut them in november, which will be the second rate cut since 2020. bank of england governor bailey said at jackson hole last month that it is not yet possible to declare victory over inflation, especially inflation in the uk service industry.

emerging market pressures ease

for emerging economies, a weaker dollar can not only ease imported inflation pressure, but also often give central banks more policy space to stimulate economic recovery.

the rmb just experienced its largest monthly increase of the year in august. the central parity rate of rmb against the us dollar was raised by 222 basis points to 7.1124. the onshore rmb rose by 1,380 basis points against the us dollar to 7.0881, and the offshore rmb rose by 1,370 points against the us dollar, breaking through the 7.08 mark at one point.

the yuan's current appreciation is mainly due to a weaker dollar, which is likely to continue, especially if exporters sell their accumulated dollar reserves. "we generally expect the yuan to gradually strengthen," said lynn song, chief economist for greater china at ing. she predicts that by the end of the year, the dollar-yuan exchange rate will rise to 7, up 1% from its current level.

liu jianheng, senior economist for greater china at standard chartered bank, said that the bank's rmb global index (rgi) continued to strengthen, thanks to the increased interest of overseas investors in rmb assets, the expansion of the scale of rmb assets held overseas, and strong issuance of dim sum bonds.

standard chartered said that in terms of offshore rmb assets, driven by the improvement of investment sentiment in hong kong stocks, southbound capital flows through the stock market rebounded, further expanding the scale of offshore rmb deposits. in may, hong kong offshore rmb deposits hit a new high of 1.13 trillion yuan. "recently, with the strengthening of expectations for the fed's interest rate cut, the pressure on rmb depreciation has eased. if this momentum continues, we believe it will become a new round of tailwinds to promote the growth of offshore rmb deposits in the second half of the year."

a weaker dollar also boosted developing currencies elsewhere, particularly in asia. the philippine peso posted its best monthly gain in about 18 years in august, while the indonesian rupiah notched its biggest gain in more than four years.

as the fed cuts interest rates, monetary policy space in emerging markets is also expected to open up. ehsan khoman, head of emerging market research at mufg, said: "we expect central banks in the philippines, singapore, south africa, south korea, taiwan and turkey to join their early counterparts in latin america and (central and eastern europe) in the rest of the year."