US stock market volatility and US dollar volatility: dual variations of policy and risk

Recently, the global financial market is experiencing a severe shock driven by the shift from Federal Reserve policy to expectations and the escalation of geopolitical risks. The volatility of the US stock market has risen under the pressure of the valuation correction of technology stocks and concerns about economic recession, while the US dollar index has shown a wide range of fluctuations in the tug of war between safe haven demand and expectations of interest rate cuts. The turbulence in the capital market is essentially a micro reflection of the global monetary policy cycle shift and the reconstruction of the geopolitical landscape.

The Federal Reserve's policy has shifted from a "tightening cycle" to a "precautionary interest rate cut". In August 2025, the US non farm payroll data only added 22000 jobs, and the unemployment rate climbed to 4.3%, reaching a new high in nearly four years. This data directly triggers market panic about an economic recession. The CME Federal Reserve Watch tool shows that the probability of a 25 basis point rate cut in September has skyrocketed to 92%, and there is even an 8% market expectation of a 50 basis point rate cut. The deterioration of the job market and the continuous decline in inflation have created dual pressures: the year-on-year increase in CPI in July has dropped to 2.8%, and the core PCE index has been below the Federal Reserve's 2% target for three consecutive months. This combination of "low growth+low inflation" forces the Federal Reserve to shift from "anti inflation" to "anti recession".

Under the expectation of interest rate cuts, the response of the US stock market to the shift in monetary policy shows structural differentiation. Technology stocks represented by Nvidia triggered a chain sell-off due to lower than expected financial reports, causing their market value to evaporate by over $200 billion in a single week, driving the Philadelphia Semiconductor Index down 5.8%. Behind this is the market's query on the sustainability of the earnings of the overvalued technology stocks - when the downward expectation of risk-free interest rates meets the early AI investment foam, valuation compression becomes inevitable. In contrast, defensive sectors such as utilities and essential consumption have gained funding favor, and the inflow of funds into the S&P 500 high dividend ETF has reached a new high since 2020.

In theory, a rate cut should lead to a depreciation of the US dollar, but the trend of the US dollar index in 2025 is showing abnormal fluctuations. The US dollar index fluctuated in the range of 98.5-100.2 in August, only down 1.8% from the beginning of the year. This resilience stems from three major supports: firstly, the European economy continues to be sluggish, with the Eurozone's GDP shrinking by 0.1% month on month in the second quarter, and the Euro's weight in the US dollar index reaching 57.6%, directly pushing up the US dollar due to its weakness; Secondly, the Bank of Japan maintains a negative interest rate policy, which reduces the attractiveness of the yen as a traditional safe haven currency; Thirdly, the demand for US dollar hedging triggered by geopolitical risks partially offset the negative impact of expected interest rate cuts.

Geopolitical risks have evolved from 'local conflicts' to' systemic shocks'. In September 2025, the military conflict between Israel and Iran resulted in the obstruction of crude oil transportation in the Strait of Hormuz, causing international oil prices to rise by 12% per week and Brent crude oil to break through $95 per barrel. The surge in energy prices not only raises inflation expectations in the United States, but also raises concerns in the market about "stagflation". Goldman Sachs' model shows that if oil prices continue to remain above $90, the US CPI in the fourth quarter may rebound to 3.5%, which will seriously constrain the Federal Reserve's room for interest rate cuts and exacerbate stock market volatility.

The Russia-Ukraine conflict has entered its fourth year, and its impact has spread from the energy field to the global supply chain. Russia's natural gas exports to Europe have decreased by 85% compared to before the war, forcing industrialized countries such as Germany to restart coal-fired power, resulting in a 400% surge in carbon emission rights prices. This "green transformation setback" not only increases the operating costs of enterprises, but also raises questions from investors about the global carbon neutrality process, putting pressure on the valuation of the new energy sector. Tesla's market value has fallen by 35% from its 2024 high.

The "tariff spiral" of the China US trade friction further exacerbates market turbulence. The Trump administration announced a 25% tariff on semiconductor companies that have not built factories in the United States, directly impacting multinational companies such as TSMC and Samsung. In response, China imposed retaliatory tariffs on US agricultural products, causing CBOT soybean futures prices to hit the daily limit down. This' tariff exchange 'not only exacerbates global inflationary pressures, but also forces multinational corporations to reassess their supply chain layouts, resulting in delayed capital expenditures and lowered profit expectations for the industrial sector.

Looking ahead to the future, the US stock market will shift from being "valuation driven" to being "profit driven". As the Federal Reserve enters its interest rate cut cycle, the US stock market will face two major tests: whether technology stocks can achieve profitable growth through AI commercialization, and whether traditional industries can withstand the impact of economic recession. Morgan Stanley strategists point out that currently, only 43% of the constituent stocks in the S&P 500 index have exceeded expectations in profits, reaching a new low since 2020. Investors are advised to pay attention to consumer monopolies with pricing power and real estate REITs that benefit from interest rate cuts.

The short-term safe haven and long-term depreciation trends of the US dollar coexist. Until geopolitical risks dissipate, the US dollar will maintain its safe haven nature, but the long-term depreciation trend is difficult to reverse. Deutsche Bank predicts that if the Federal Reserve cuts interest rates by 100 basis points in 2025, the US dollar index may fall below 95. It is recommended that cross-border investors increase their allocation of currency assets such as euros and Chinese yuan, while using gold to hedge against US dollar risks.

The commodity market presents a dual world of energy and precious metals. The crude oil market is facing a dual game of "geopolitical premium" and "economic recession discount", and the reasonable price range for Brent crude oil should be between $85-95 per barrel. In contrast, the safe haven nature of gold will continue to strengthen, and COMEX gold futures prices are expected to break through $2600 per ounce, setting a new historical high.

In this financial drama co directed by monetary policy and geopolitics, investors need to abandon "unilateral thinking" and instead build a combination strategy of "anti volatility+seizing opportunities". As Dalio, the founder of Bridgewater Fund, said, "When the tide recedes, only investors who know how to defend against risks and capture structural opportunities can cross the fog of the cycle