US Dollar Index (DXY) declined as inflation eases: Markets rally on rate cuts optimism 

May 17, 2024

Key Points: 

• The US Dollar Index (DYX) falls 1% after US inflation data shows decline. 
• Major currencies rose against USD, while gold prices jumped to the $2,400 price level. 
• Lower inflation rekindles hopes of Federal Reserve rate cuts. 

The US Dollar Index (DXY) experienced a sharp decline on 15 May 2023 (Wednesday), dropping about 1% from 105.04 to the 104.20 zone. This marks the third consecutive losing session for the greenback, which has now erased approximately 3% of its valuation this month. The catalyst for this decline was the latest US inflation data, which showed a slight decrease in the consumer price index (CPI).  

Inflation data sparked market rally 

The CPI retreated to 3.4% in April, down from 3.5% in March. Although this decrease may seem modest, it was enough to boost investor confidence that the Federal Reserve might consider this decline when determining interest rate policies for the remainder of the year. Lower inflation pressures have rekindled hopes for potential rate cuts, prompting a broad market rally. 

How other currencies reacted to the USD 

With lower inflation rekindling more rate cuts from the US Fed, most currencies turned stronger against the USD. A few notable currency pairs include: 

• EURUSD: The pair surged by 1%, trading near $1.09, as the Euro (EUR) gained strength against the US Dollar (USD). This move reflects broader market sentiment favoring currencies of economies with more stable monetary policies. 
• GBPUSD: The British Pound (GBP) also advanced, moving close to $1.27. Rise of the GBP was supported by similar expectations that the Bank of England might adopt a more measured approach to rate hikes compared to the US Fed. 
• USDJPY: The Japanese Yen (JPY) strengthened, with the pair dropping to around 135. This shift indicates a flight to safety, as the JPY often benefits when the USD undergoes periods of weakness. 

Gold started rushing up 

Gold (Symbol: XAUUSD) jumped near $2,400, reflecting increased demand for the precious metal as a hedge against potential economic uncertainty and a weaker USD. Historically, gold tends to rise when the USD falls, as it becomes cheaper for investors holding other currencies. The recent inflation data and corresponding market reactions have reinforced this trend. 

Related article: Gold climbs as anticipation of Fed rate cuts increases appeal 

Stock market soars to record highs 

Stock indexes including S&P 500 (Symbol: SP500), Nasdaq Composite Index (Symbol: NAS100) and Dow Jones Industrial Average (Symbol: DJ30) also benefited from the inflation data, with all of them reaching record highs. The prospect of lower interest rates, which can reduce borrowing costs and boost economic activity, has been a key driver of this optimism. Investors are now eagerly anticipating the Federal Reserve’s next moves, which could further influence market trajectories. 

Related article: US stocks soar as Fed takes a soft landing 

What should you look out for 

If inflation continues to decline, the USD may face further downward pressure as rate cut expectations grow. And investors will in turn likely seek diversification into other assets such as gold and other major currencies, which often benefit from a weaker dollar. 

In such uncertain times, communication on interest rate policy by the US Fed will be crucial in shaping market expectations and movements. That being said, market participants ought to remain grounded, keeping economic fundamentals and technical analysis in check with their trading strategies.  

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