This issue has been discussed several times, but it can be elaborated on further. The fluctuations of the US Dollar Index (DXY) are caused by many factors, but for investors, understanding the two key factors is sufficient:
The decline of the dollar is due to a recession or downturn in the economy, leading to dollar depreciation.
The depreciation of the dollar is caused by a shift in US monetary policy towards easing.
In the first scenario, although the dollar is depreciating, it does not mean that investors' risk appetite will increase; rather, it is due to concerns about the US economy. During this time, investors may even be reluctant to invest in US Treasuries.
In the second scenario, the depreciation of the dollar indicates an increase in investors' risk appetite, as the yield on the dollar has decreased. Holding dollars to buy US Treasuries feels less appealing, so investors are more inclined to invest in riskier assets.
Currently, we are in a mixed phase of the first and second scenarios, but it leans more towards the first. More investors are worried about potential issues in the US economy and are seeking better safe-haven assets. However, if a recession does occur, the risk market may also decline when the dollar falls.
During a recession, if the Federal Reserve has not fully cut interest rates, or if there is a significant sell-off of US Treasuries overseas, leading to a substantial increase in the supply of US Treasuries, we may also see long-term yields rise passively.
The decline of the dollar index is not always bullish; the key is whether it reflects expectations of future prosperity or fears of recession.
PS: If the European economy declines more severely, even if the US is not doing well, the dollar may still be "relatively stronger," and the DXY may not fall.
This post is sponsored by @ApeXProtocolCN | Dex With ApeX
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