CPI and retail sales data will be released this week. Can the US dollar index break free from the "falling curse"?
2025-08-11 16:45:59
The US dollar index fell slightly by 0.09% during the Asia-Europe session on Monday (August 11), trading below its 10-, 20-, and 50-day moving averages. Its medium-term trend is suppressed, and it is currently trading at 98.14, below the 100-day mark. Fluctuations in the US dollar index are closely tied to the market's assessment of the attractiveness of US dollar assets. The index is also subject to multiple influences from policy expectations, economic data, and market sentiment.
The US dollar index reflects the strength of the US dollar relative to a basket of currencies, reflecting global capital allocation to US dollar assets. The logical chain of "interest rates - attractiveness - capital flows" clearly illustrates the transmission path of policy expectations to the US dollar index.
Market expectations for Federal Reserve policy are a fundamental variable influencing the US dollar index. As the market currently anticipates multiple rate cuts from the Fed this year, Michael Feroli, JPMorgan Chase's chief US economist, believes that "the market currently anticipates at least two rate cuts this year." "For Powell, risk management considerations at the next meeting may go beyond balancing employment and inflation risks. We now believe the path of least resistance is to bring forward the next 25 basis point rate cut to the September meeting."
If the Fed cuts rates as expected, the ECB, by contrast, appears to have ended its long cycle of rate cuts. There is an 86.3% probability that the deposit rate will remain at 2.00% at its next meeting on September 10, suggesting that after several rate cuts earlier this year, the ECB now believes a neutral monetary policy stance is appropriate.
This could significantly reduce the relative attractiveness of the US dollar," thereby "reducing demand for US dollar-denominated assets." Capital outflow from US dollar assets directly led to selling pressure on the US dollar in the foreign exchange market, pushing the US dollar index lower.
Therefore, the rising expectations of the Federal Reserve's interest rate cuts have become the "source" factor currently affecting the US dollar index.
Signs of a continued surge in the stock market continue to emerge. Apollo Chief Economist Torsten Sloane noted in recent research that Nvidia, the largest stock in the S&P 500, has reached its highest price-to-earnings ratio since Microsoft in 1999. Initial public offerings (IPOs) such as Firefly Aerospace (FLY) continued to soar on their first day of trading, and cryptocurrencies and cryptocurrency-related stocks also saw a new rally.
"This reflects the continued rise in market risk appetite. In an environment of rising risk appetite, capital is more inclined to flow into high-yield risky assets rather than the US dollar, which is primarily a safe-haven asset. This sentiment factor will work together with policy expectations to suppress the US dollar index. The potential trend of the US dollar index can be summarized as "mainly under pressure in the short term, and dependent on policy balance in the long term."
UBS senior economist Alan Detmeister noted that the July CPI report released on Tuesday (August 11) is expected to provide an update on how tariffs are affecting inflation.
Wall Street economists predict that overall inflation will rise 2.8% year-on-year in July, up from 2.7% in June. "The CPI is expected to rise 2.8% in July," they write. "Tariffs are accelerating inflation, and July's data will kick off a multi-month upward trend. Detmeister predicts that the core CPI will rise from 2.9% in June to 3.5% by year-end." If inflation exceeds expectations, the Federal Reserve may be forced to reassess the pace of interest rate cuts. However, the current market consensus still favors rate cuts over the long term, so subsequent inflation data is more likely to be interpreted as increasing the need for rate cuts, further solidifying the pressure on the US dollar index.
On Friday (August 15th), investors will get an update on consumer spending with July retail sales data. Economists expect overall retail sales to rise 0.5% in July, slightly slower than the 0.6% increase in the previous month. However, Michael Reid, senior US economist at Royal Bank of Canada, wrote in a note to clients that a large portion of this increase is expected to come from auto sales. In the control group of retail sales (a subsector that excludes several volatile categories, such as autos, and is included in the quarterly gross domestic product (GDP) data), Reid expects sales to rise just 0.1%. "With the exception of auto sales, we expect the rest of the data to be lackluster," Reid wrote.
In summary , with expectations of a Fed rate cut dominating and risk appetite rising, the US dollar index is more likely to face continued pressure in the short term. The strength of this trend will be determined by further revisions to policy expectations based on data such as the July CPI and retail sales.
(US Dollar Index daily chart, source: Yihuitong)
Beijing time: 16:25, the US dollar index is currently at 98.17.
Expectations of a Fed rate cut put pressure on the US dollar index
The US dollar index reflects the strength of the US dollar relative to a basket of currencies, reflecting global capital allocation to US dollar assets. The logical chain of "interest rates - attractiveness - capital flows" clearly illustrates the transmission path of policy expectations to the US dollar index.
Market expectations for Federal Reserve policy are a fundamental variable influencing the US dollar index. As the market currently anticipates multiple rate cuts from the Fed this year, Michael Feroli, JPMorgan Chase's chief US economist, believes that "the market currently anticipates at least two rate cuts this year." "For Powell, risk management considerations at the next meeting may go beyond balancing employment and inflation risks. We now believe the path of least resistance is to bring forward the next 25 basis point rate cut to the September meeting."
If the Fed cuts rates as expected, the ECB, by contrast, appears to have ended its long cycle of rate cuts. There is an 86.3% probability that the deposit rate will remain at 2.00% at its next meeting on September 10, suggesting that after several rate cuts earlier this year, the ECB now believes a neutral monetary policy stance is appropriate.
This could significantly reduce the relative attractiveness of the US dollar," thereby "reducing demand for US dollar-denominated assets." Capital outflow from US dollar assets directly led to selling pressure on the US dollar in the foreign exchange market, pushing the US dollar index lower.
Therefore, the rising expectations of the Federal Reserve's interest rate cuts have become the "source" factor currently affecting the US dollar index.
The dollar is under pressure amid risk appetite and policy difficulties.
Signs of a continued surge in the stock market continue to emerge. Apollo Chief Economist Torsten Sloane noted in recent research that Nvidia, the largest stock in the S&P 500, has reached its highest price-to-earnings ratio since Microsoft in 1999. Initial public offerings (IPOs) such as Firefly Aerospace (FLY) continued to soar on their first day of trading, and cryptocurrencies and cryptocurrency-related stocks also saw a new rally.
"This reflects the continued rise in market risk appetite. In an environment of rising risk appetite, capital is more inclined to flow into high-yield risky assets rather than the US dollar, which is primarily a safe-haven asset. This sentiment factor will work together with policy expectations to suppress the US dollar index. The potential trend of the US dollar index can be summarized as "mainly under pressure in the short term, and dependent on policy balance in the long term."
Economic data further revised policy expectations
UBS senior economist Alan Detmeister noted that the July CPI report released on Tuesday (August 11) is expected to provide an update on how tariffs are affecting inflation.
Wall Street economists predict that overall inflation will rise 2.8% year-on-year in July, up from 2.7% in June. "The CPI is expected to rise 2.8% in July," they write. "Tariffs are accelerating inflation, and July's data will kick off a multi-month upward trend. Detmeister predicts that the core CPI will rise from 2.9% in June to 3.5% by year-end." If inflation exceeds expectations, the Federal Reserve may be forced to reassess the pace of interest rate cuts. However, the current market consensus still favors rate cuts over the long term, so subsequent inflation data is more likely to be interpreted as increasing the need for rate cuts, further solidifying the pressure on the US dollar index.
On Friday (August 15th), investors will get an update on consumer spending with July retail sales data. Economists expect overall retail sales to rise 0.5% in July, slightly slower than the 0.6% increase in the previous month. However, Michael Reid, senior US economist at Royal Bank of Canada, wrote in a note to clients that a large portion of this increase is expected to come from auto sales. In the control group of retail sales (a subsector that excludes several volatile categories, such as autos, and is included in the quarterly gross domestic product (GDP) data), Reid expects sales to rise just 0.1%. "With the exception of auto sales, we expect the rest of the data to be lackluster," Reid wrote.
In summary , with expectations of a Fed rate cut dominating and risk appetite rising, the US dollar index is more likely to face continued pressure in the short term. The strength of this trend will be determined by further revisions to policy expectations based on data such as the July CPI and retail sales.
(US Dollar Index daily chart, source: Yihuitong)
Beijing time: 16:25, the US dollar index is currently at 98.17.
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