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Softening growth in consumer price inflation, paired with declining producer, export, and import prices, lent greater weight to the case against further hikes at the Federal Reserve. These data points have started to take the wind out of the sails for a previously ascendant US Dollar Index (DXY). Though the DXY has ultimately trended lower since peaking in September 2022, it has been a relatively restrained decline due to the Fed only gradually phasing out its aggressive rate hike regime.

With a conclusion to Fed hikes now priced in as the base case, according to Fed Funds futures traders, the potential benefits of a weaker Dollar could flow downstream to emerging markets. EM currencies have been beaten down over the past couple of years, but the prospect of a rebound could bolster GDP growth and earnings figures for local firms, while cutting servicing costs for a massive load of Dollar-denominated debt held in EM economies.

Related ETFs: iShares MSCI Emerging Markets ETF (EEM), iShares MSCI Emerging Markets ex China ETF (EMXC), WisdomTree Emerging Currency Strategy Fund (CEW), Invesco DB US Dollar Index Bullish Fund (UUP)

The US Dollar Index (DXY) fell to a 2-month low earlier this week on consumer price inflation data that was softer than expected. A gradual pace of disinflation has taken hold and appears to indicate the Federal Reserve has wrangled inflation for the moment. The slowing pace of growth in the CPI was compounded by outright deflation in producer prices, as well as import and export price data.

These data points have increased the likelihood that the Fed has concluded its spate of rate hikes, reaching a terminal Fed Funds rate of 5.5%. If so, that would fall one hike short of what Fed policymakers projected for 2023 in September’s dot plot. Fed Funds futures contracts traded on the Chicago Mercantile Exchange (CME) indicate that traders see no further hikes going forward into 2024.

When interest rates rise in the US, the higher yields can attract investment capital from investors abroad who exchange assets in non-USD currencies for Dollar-denominated investments. This demand, in turn, raises…

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