The DXY Index’s recovery looks overstretched after having appreciated 3% so far this month. Although the Fed has rolled back the market’s expectations for more of last month’s 50 bps rate cut, it plans to follow up with two 25 bps cuts on November 7 and December 18 after the US Presidential Elections on November 5. With this month’s rise in the US Treasury bond yields stalling near 4%, the DXY should be lower, around 102 instead of higher and close to 104.
Speculators may be overly optimistic about Trump 2.0 or a re-enactment of the DXY’s late rally into former President Donald Trump’s surprise win at the 2016 US Presidential elections. While the race to the White House on November 5 is tight between Trump and Vice President Kamala Harris, the Democrats are better prepared this time around. According to the polls, neither the Republican nor the Democratic Party are expected to control both the Senate and the Lower House. The GOP won the majority in both houses in 2016, while the Democratic did the same in 2020.
Moreover, the US federal debt has ballooned during the Trump and Biden presidencies and has become an issue amid de-dollarisation worries. Hence, the economic policies in the next presidential term will likely be constrained, much less become an inflation problem issue. US inflation bottomed near 0% in late 2015 and, by mid-2016, showed signs of rising towards the 2% target, prompting a Fed hike every quarter between December 2016 and December 2018. Today, more Fed officials are confident that inflation will fall to the 2% target in 2025, mulling the possibility of returning rates to neutral.
Our view remains that the US economy will slow down to 1.7% in 2025 from 2.3% this year, and the Fed Funds Rate will decline another 200 bps to 3% between November 2024 and September 2025.
We also want to leave some thoughts on China before the weekend. The Chinese government started to cool its property sector in 2016 and intensified measures in 2020. This contrasted sharply with the measures over the past month aimed at putting a floor to its struggling real estate sector. Since Trump’s first tariffs in 2018, China has responded with direct retaliation and strategic adjustments aimed at reducing reliance on the US while bolstering domestic industrial capabilities and international partnerships.
Quote of the Day
“Calls for walling America off with high tariffs on friends and competitors alike or by treating even our closest allies as transactional partners are deeply misguided.”
US Treasury Secretary Janet Yellen, speech to the Council of Foreign Relations on Oct 17, 2024
October 18 in history
In 1867, US took formal possession of Alaska from Russia, after paying USD7.2 million in the Alaska Purchase.
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