The financial landscape is witnessing a profound shift, particularly following the Federal Reserve's recent decision to cut interest rates by 25 basis pointsThis development has prompted several financial institutions to adjust their dollar fixed deposit interest rates, with three-month rates retreating to around 4%. Coupling this adjustment is a broader trend where newly issued dollar financial products are also seeing a decline in their performance benchmarks, with the lower limits for these products now falling below 4%. Such a scenario raises vital questions among investors about the future viability and attractiveness of dollar-denominated financial instruments.
The ongoing decrease in yields has inevitably fueled discussions among market participants regarding the potential for dollar-denominated investment products to remain appealingAlthough interest rates are entering a downward cycle, many analysts argue that these dollar products still retain a distinct advantage in returns compared to other financial offerings
Furthermore, there are indications that the dollar's strong positioning will persist, which encourages continued investor interest in related products in the short term.
In recent analyses, banks such as HSBC Hong Kong, Hang Seng, and Dah Sing have reduced their dollar fixed deposit rates significantly, particularly for three-month terms, where the interest rates now hover around 4%. For new customers, certain banks are offering special rates as low as 4.7% for dollar fixed depositsSimultaneously, the yield on newly issued dollar financial products has also seen a pronounced declineData from Wind indicates that the annualized performance benchmarks for ten dollar financial products set to be established between January 2nd and 9th, 2025, have generally decreased to a range of 3.5% to 3.8%. Notably, benchmarks for strictly bond-related or “bond plus” dollar financial products launched earlier in December stood around 4%.
Senior analyst Ai Yawen from the Digital Technology Research Institute pointed out that the increasing extent of interest rate cuts poses a tangible risk of diminished expected returns on dollar products
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In agreement, economist Yu Fenghui noted that the Fed's decision to lower rates has begun exerting pressure on the yields of existing dollar financial productsThis trend might lead to a contraction in both the quantity and scale of active dollar products, with newly issued products expected to reflect significantly lower anticipated returns.
The performance data of existing dollar financial products has begun to showcase volatility, with recent figures revealing that over 960 dollar financial products disclosed their net values within the last six monthsAmong these, more than 30 have seen their latest unit net values dip below 1, marking an increase in the number of products breaking net value relative to the same period last monthFurthermore, there's a widening gap in the yields across different dollar investment productsA recent report from Nanfang Financial Services emphasizes that for dollar-denominated fixed income products within a 1 to 2-year investment cycle, there is substantial divergence, with yield differences exceeding 6%. For instance, the highest yielding product, Xingyin Wealth’s “Wanhuitong No
2 E-type A,” has exhibited nearly 7.98% growth over the past year, whereas the lowest, China Merchants Bank’s “Zhaorui Overseas QDII (Dollar), Two-Year Lockup No9 J,” posted a meager 1.29% growth.
Market analysts concur that the short-term dominance of the dollar and the comparative strength of the U.Seconomy will likely continue to shape global financial trendsResearch from Guotou Ruibin highlights the ongoing success of U.Sequities, pointing out that the continued strength of the dollar showcases the resilience and competitive edge of the U.Seconomy in a global contextThe analysis recognizes that robust government policies, coupled with the foreign exchange market's digestion of additional tariffs, is likely to sustain long-term dollar strengthEven though volatility often escalates at market turning points, current levels of dollar and emerging market currency volatility remain in a normal range, indicating that a market inflection point is not yet upon us.
According to Ai Yawen, whilst globally declining interest rates and sluggish economic growth enhance the appeal of dollar assets, the actual turning point will hinge on the sustainability of the Fed’s rate cuts and shifts in market confidence towards these assets
Should the pace of Fed rate reductions slow down in 2025, it might delay any expected turning points significantly.
Huatai Securities has also indicated a likely period of relative dollar strength aheadThrough a technical analysis and a review of global currency movements against the dollar, they project that the dollar index may exhibit even stronger performance moving forward.
In a recent issuement of a 2025 global market outlook, Standard Chartered Bank’s General Manager Liang Dawei outlined expectations of short-term fluctuation for the dollar, with the index expected to remain around the 106 markIn the context of a sustained dollar strength prediction, market sentiments regarding dollar asset allocation are also on the riseShenwan Hongyuan has indicated an adjustment in investment return expectations for strong assets in 2024, suggesting vigilance in preparation for increased volatility
Their recommendation leans towards an overweight allocation of U.Streasuries and gold assets in the first half of 2025, while maintaining standard equity asset allocations.
Despite the impending interest rate cuts, the dollar maintains a relative yield advantage that makes dollar financial products compelling options post-cutData from Puyi Standard reveals that as of December 12th, the average annualized yield from cash management and fixed income products has been a mere 1.89% and 3.36%, respectivelySpecifically, pure fixed income products have shown an average annualized return of 3.44%, while "fixed income plus" offerings have fared slightly lower at 3.31%.
In stark contrast, dollar financial products retain a clear edge in expected returnsBy December 26th, nearly 970 dollar products disclosed their latest unit net values, with around 315 exhibiting returns greater than 4% over the last three months, and over 70 products exceeding a 5% return
Ai Yawen notes that, in the context of Fed rate cuts, personal dollar products continue to showcase a spread advantage over their renminbi counterpartsThis attractive trend is influenced by various factors including the global economic climate, interest rate fluctuations, and the trajectory of the dollar index, ensuring that the allure of dollar financial products endures in the near term.
Recent products reiterate that the performance outlook for dollar financial products remains markedly higher than other fixed income alternativesAccording to Wind data, the aforementioned ten dollar financial products set for launch in early January 2025 are predominantly low-risk fixed income products, with annualized performance benchmarks starting from 3.5%. More than half of these offerings show performance benchmarks ranging between 4% and 5%.
A representative from a joint-stock bank’s financial services department shared that, although many newly launched dollar financial products are witnessing drops in expected return rates, they still hold significant yield advantages over fixed income products averaging 2% to 3% annually, making them quite attractive to clients, with newer products often selling out quickly.
This market demand continues to fuel a surge in the creation of new dollar financial products
Recent figures from Wind indicate that since October, over 240 new dollar financial products have been introduced, with more than 90 established solely in DecemberNotably, QDII dollar bond funds, primarily focused on dollar bonds, are becoming increasingly popular among investorsData reveals that nearly 30 new dollar QDII pure bond fixed income or “fixed income plus” products have been created since October alone.
Hua Xia Fund’s analysis emphasizes that while the Fed's hawkish rate cuts may prompt a slowdown in forthcoming reductions, they also signal the need for caution in aggressive trading regarding future rate expectations, particularly as U.Sbond yields have recently flared up to reach the highest levels seen in six monthsThis robust performance of U.Streasuries has intensified investor enthusiasm for respective assets.
Market participants have highlighted that the arrival of the rate cut cycle potentially opens new opportunities for dollar bonds
QDII funds typically select premium, scarce low-volatility assets, be it dollar deposits or U.Sbonds, to craft balanced portfolios that are inherently less volatileAs a result, these offerings are increasingly favored by investors, as they require lower minimum investments and remain flexible and robust.
China Post Financial has marketed a newly launched QDII product, primarily geared towards investment-grade Chinese dollar debtThis product not only hedges against exchange rate risks but also offers a strategic tool for investors aiming to allocate offshore fixed income assets.
Moreover, as the appetite for dollar asset allocation persists, financial institutions are likely to intensify their efforts in diversifying relevant productsYu Fenghui highlights that previously, during the Fed’s rate hike cycle, dollar financial products attracted significant investor interest due to their stability and appeal
To maintain this attraction, financial institutions may amplify product diversity, perhaps introducing shorter duration or more flexible term offerings, enhancing their service experience, offering accessible purchasing channels, and ensuring greater transparency in disclosures.
Fenghui further asserts that allocation strategies for dollar financial products must be tailored to individual investors' financial statuses, risk appetites, and investment goalsSome conservative investors may still prefer dollar financial products for stable yields; however, the inclination among such investors may weaken as interest rates dropConversely, more aggressive investors could seek alternatives, such as opportunities in international marketsGiven these shifting demands, financial institutions need to enhance product differentiation and personalize services, orienting efforts towards developing products that cater to a range of risk profiles, whilst bolstering investor education for understanding market dynamics and making informed asset allocation decisions.
Nonetheless, for average investors, maintaining a focus on risk diversification remains paramount within dollar asset allocations
Ai Yawen warns that the Fed's rate cuts could stir potential dollar depreciation, heightening currency exchange risks, necessitating a comprehensive assessment of exchange rate exposures, interest rate vulnerabilities, and personal funding needsImportantly, investors should also remain cognizant of yield spreads, as these will directly impact returns on dollar products.
In Ai Yawen's view, for those who have a need for dollar asset allocation or foresee potential future engagement with dollars, dollar financial products can serve as instruments for risk diversification and an avenue for additional returnsYu Fenghui echoes this sentiment, suggesting that from an asset allocation standpoint, the Fed's rate cuts usually dampen the allure of dollar-related assets, prompting fund allocations towards alternative markets or asset categories, such as emerging market bonds, equities, or gold as safe-haven assets