Last Friday, due to the unexpected rebound of the US unemployment rate in October to 3.7%, it provided some data support for the Federal Reserve to slow down its interest rate hike to 50 basis points in December. The US dollar index fell nearly 2% last Friday and continued its downward trend on Monday.

Non US currencies, gold and silver, crude oil, and the stock market have all experienced significant rebounds to varying degrees. The market seems to be intoxicated with the optimistic sentiment that the Federal Reserve will slow down the rate hike, but has ignored the impact of the Federal Reserve's higher than expected interest rate peak on the market and the impact on economic entities in a high interest rate environment.

Due to the continuous increase in the federal benchmark interest rate, the interest rate on home mortgages in the United States has also skyrocketed, with the 30-year home mortgage interest rate already exceeding 7%. Due to the lag in the transmission of loan interest rates due to the increase in benchmark interest rates, if the Federal Reserve raises interest rates to 5% or above next year, the interest rate on 30-year residential mortgages may reach over 9%. High mortgage prices will severely limit the other living expenses of American residents, and the economy will rapidly cool down and fall into recession.

Judging from the current trend of the US dollar, it is still too early to judge whether the top has appeared. We will analyze the timing of several major peaks in the US dollar index this century, referring to the following two charts.

2000 – 2002 (the US Internet foam burst): The US dollar index started an upward trend in 1998, and fell into a high and fluctuating upward trend at the end of 2000 and the beginning of 2002. In February 2002, the upward trend stopped and the downward cycle began. In terms of inflation, inflation in the United States has been rapidly declining since May 2001, reaching its bottom in February 2002 and beginning to consolidate at a low level.

2008-2009 (US subprime mortgage crisis): After the outbreak of the US subprime mortgage crisis, the US dollar index rapidly rose after April 2008. After the first round of QE by the Federal Reserve in November 2008, it began to experience high volatility, and then reached its peak in March 2009 before turning into a downward trend. In terms of inflation, US inflation fell below 0% in December 2008, hit a low of -1.95% in July 2009, and remained below 0% in the first 10 months of 2009.

December 2009 – June 2010: The Federal Reserve conducted its first round of QE stimulus in November 2008, and the US economy experienced a certain degree of rebound. The CPI began to rise rapidly in the second half of 2009 and rose to 2.8% in December 2009, reaching the Federal Reserve's target of 2%. However, due to the far-reaching impact of the subprime mortgage crisis, the US economy experienced sluggish growth in 2010, and inflation continued to decline. It hit 1.1% in June 2010 and subsequently fell into low consolidation. The US dollar index peaked in June 2010.

2014-2017: Under the influence of three rounds of QE, the US economy accelerated its recovery pace in 2014, much faster than in Europe and Asia. The US dollar index has started a new upward cycle since July 2014, but in 2015, economic growth fell into weakness, and inflation rapidly declined since the second half of 2014, reaching below 0% at one point in early 2015. The US dollar index entered a period of repeated consolidation in the first half of 2015, and was generally stronger under the influence of expected interest rate hikes. During the interest rate hike cycle, it reached a peak of 103.8 in January 2017 and then turned down.

2018 – 2020: The US dollar index started a two-year upward trend. At the beginning of 2020, the COVID-19 broke out. The US CPI declined rapidly in February 2020 and hit a low of 0.36% in May 2020. The US dollar index began its downward cycle after reaching a peak of 103 in March 2020.

We can draw a conclusion from the above analysis that the condition for the US dollar to peak only occurs when the economy experiences a significant cooling and recession, and the inflation level should be lower than the Federal Reserve's target. Currently, the CPI in the United States is still above 8%, the economy is still in a strong state, and the labor market is still hot. Therefore, the short-term decline in the US dollar index may trigger a new round of upward counterattack.

From a trend perspective, the US dollar index has shown an accelerated upward cycle since February 2022, and the current upward structure has not been disrupted. Therefore, the current strategy remains primarily bullish on the US dollar. The price has been in a high adjustment since September, but the adjustment does not mean bearish. Therefore, we anticipate that prices may enter an upward cycle again after the adjustment is completed.