article: Ma Wen
Compared with other major currencies in the world, the US dollar is in its strongest stage in more than 20 years, becoming one of the most concerned issues in the global investment community.
On September 28, offshore RMB fell below the 7.2 yuan mark of 1 US dollar against RMB, the lowest value since China launched a separate overseas RMB trading system in 2011. In the onshore market, which is under stricter control, it also fell below 7.2 yuan, which is the first time that it has fallen below this mark since February 2008. This marks the decline of the offshore RMB against the US dollar this year to about 12%.
The rapid depreciation of the RMB has attracted intervention in the foreign exchange market. Starting from September 28, the foreign exchange risk reserve ratio for forward foreign exchange sales business has been raised from 0 to 20%, but it did not prevent the breakthrough of 7.2 on the same day. As of October 25, it has exceeded 7.3.
It is worth mentioning that the RMB has depreciated against the US dollar, but the amplitude is far less than the increase of the dollar index (DXY, the weighted average of the exchange rate of the six major international currencies ) during the same period. DXY has risen by more than 18% since the beginning of this year, up 40% from the lowest level in 2011. In other words, compared with euro , pound pound and yen, the RMB is still a relatively strong currency in international currency market .
Why is the US dollar so strong?
1, 5 Fed hike rate . In order to curb inflation, the Fed decided to continue hikes at a faster rate than other major countries, creating a huge interest rate gap with other regions that insist on low interest rates or resist large interest rate hikes, which means that financial products such as U.S. government bonds have higher returns, resulting in the flow of international funds from emerging markets back into the U.S. market. In July 2022 alone, foreign investors purchased US$102 in U.S. government bonds, up to 7.5 trillion of U.S. bonds are owned by foreign investors. The Fed is expected to continue hikes in interest rates, which may further increase the value of the dollar.
The Fed's continued interest rate hike further increased the value of the US dollar.
2, 5 The global economy has risen risk of recession, especially in Europe and Asia. Against this background, funds have begun to flow out of the Eurasian stock market, flowing to the US dollar, which is regarded as a safe haven.
3, The European energy crisis triggered by the Ukrainian war will enter a critical moment this winter, and market uncertainty will also reach its peak. This uncertainty has also prompted investors to turn to safe-haven assets, including the US dollar.
4, The US energy independence, the dominance of the US dollar in the international payment system, and the high dollar-denominated debt in emerging markets also support the US dollar. What are the beneficiaries of the strengthening of
USD?
1 and will make US imports cheaper, increase the relative purchasing power of Americans, and help reduce US inflation.
2, can stabilize the US economy through trade, because imports become cheaper, making it easier to replace domestic products. Exchange rate changes benefit from manufacturers who import parts from foreign countries and use them in U.S. factories.
3 and will increase the income of American deposits and pension funds, which will benefit the interests of pensioners and savers.
4 and benefit Americans traveling to other countries, especially in South Korea, Japan, and the euro zone countries. Compared with before, consumers can buy more products with the same amount of US dollars.
USD strengthening will increase the relative purchasing power of Americans.
5 and can help investors in the United States buy foreign bonds at low prices.
6, The depreciation of the domestic currencies of the U.S. trading partners will make companies in these countries more competitive because their exports will become cheaper.What are the injured people who strengthened the US dollar?
1, Countries - especially developing countries and low-income countries - have increased prices for imported food, fuel, medicines and other commodities.
2, Many developing countries and low-income countries will default on US dollar debt, especially for those countries with a large amount of US dollar debt, such as Turkey , Argentina and Ghana. The debt repayment cost may be unsustainable, and in severe cases it will lead to currency and economic collapse. Data shows that the total amount of bad debts in developing countries has reached US$250 billion, while global debt has jumped to a record level of more than US$305 trillion. Developed countries will also face pressure. For example, many central banks around the world are competing to tighten the monetary policy of in an attempt to curb inflation, but the rise of the US dollar has made it more difficult for these central banks to fight inflation. At the same time, central bank officials are also worried that raising interest rates too quickly may trigger a recession in their own country and exacerbate the slowdown in global economic growth. The strengthening of
USD will cause the prices of imported goods in many countries to rise.
4, The United States' exports are more expensive and put a burden on export companies, resulting in some U.S. exporters cut production, which may further disrupt the recovery of U.S. manufacturing, because foreign manufacturers will gain an advantage when selling products to the United States.
5 and affect the sales and international profits of American companies that invest overseas in setting up factories. Since June, US companies engaged in multinational businesses have lowered their profit expectations on the grounds of appreciation of the US dollar. Microsoft 's revenue fell by $595 million in the latest quarter due to exchange rate losses. In order to avoid possible huge exchange rate losses, most American companies choose to keep their profits locally for the time being.
6, increase the cost of travel, travel and learning in the United States.
Why do most countries raise interest rates instead of China cutting interest rates?
Many countries in the world are raising interest rates to support their own currencies, but China has maintained a policy of lowering interest rates. The key reason is that the biggest economic challenges and risk points they face are different.
The key reason why the Federal Reserve continues to raise interest rates is that the release of money in the past two years was too strong, and fatal inflation followed. Since March this year, the US CPI index has continued to maintain a high of more than 8%. The living standards of ordinary Americans are continuing to be lowered by high inflation. However, the U.S. unemployment rate is at a low level, so the Fed still has room for further tightening monetary policy.
The situation in Europe is much worse. The euro zone inflation rate reached 9.1% in August (year-on-year) and may continue to rise in the short term. In order to curb inflation, the European Central Bank 6 raised its policy interest rate in July, the first time in 11 years and the first time in eight years that its deposit interest rate turned from negative to positive. For the euro zone economy, this is likely to be a difficult and painful process, and there is a high probability that there will be an economic recession or even a " de-industrialization " crisis.
As for China, the depreciation of the RMB may stimulate capital outflows or put a lot of pressure on the asset bubble, so China does not want the RMB to depreciate too quickly.
The downward pressure on the Chinese economy is currently facing is very great, but unlike the United States and Europe, China's inflation is still benign. In August, the CPI index rose by 2.8% year-on-year, providing greater flexibility for the formulation of economic policies. Therefore, continuous interest rate cuts can be maintained in monetary policy, and the operation of the economy will be more dynamic through the continuous injection of market liquidity. What impact does the top US dollar have on the Chinese people?
For ordinary Chinese people, except for Chinese people who need to go to the United States to do business and study, the strengthening of the US dollar has little impact on the vast majority of Chinese people, because everyone holds RMB and almost all expenditures are settled in RMB. If you have to choose other currencies for international settlement, try to avoid choosing US dollar payments, which is a way to minimize the harm to the people of the appreciation of US dollar.
For Chinese workers working in the United States, the strong dollar is a great thing. It is estimated that foreign workers in the United States remit about $150 billion in a year: of which $30 billion was transferred to Mexico , $16 billion was transferred to China, $11 billion was transferred to India, and $11 billion was transferred to the Philippines. The stronger the dollar, the more other currencies it can be exchanged for. This will improve the situation of those who accept overseas dollar remittances.
What factors will affect the exchange rate in the future?
1, Supply and demand relationship. If the demand for a certain type of currency increases in the market, its value will increase and it will appreciate.
2, Economy. If the economy is strong, the currency will be strong, because other countries need to invest and need local currency to achieve it, which will increase demand.
3, savings. For example, if the People's Bank of China raises interest rates, the attractiveness of RMB savings and investment will be increased because the rate of return is higher. In this way, the demand for the RMB will increase.
4, Treasury. The accounts status of the official bank—or how much money you deposit and how much debt you owe—can also affect the exchange rate.
5, speculation. Exchange rates are quite affected by currency speculators—those who buy and sell currencies based on expectations for future events—. The vast majority of the day-to-day fluctuations of the exchange rate depend on the actions of speculators, or their confidence in a country's economic prospects. When will the $5 surge end?
From a long-term perspective, the core CPI of the United States has fallen to less than 3%, and the comprehensive CPI has fallen to less than 5%. The Federal Reserve will lose the reason to continue aggressive interest rate hikes, and the strong US dollar will come to an end.
The Federal Reserve raised interest rates for the third consecutive time in September by 75 basis points, bringing the benchmark interest rate to the range of 3.0%-3.25%, and hinting that further interest rates will be raised to curb high inflation. The Fed expects the benchmark interest rate to reach 4.40% by the end of the year and will hit a peak of 4.60% by 2023.
The Federal Reserve's forecast shows that interest rate cuts will not start until 2024, but investors speculate that if the US economy experiences a deep recession and inflation drops sharply, the Federal Reserve may take rate cuts in advance, which may cut interest rates in the second half of 2023, which may trigger a downward trend in the US dollar.
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