But if this is the case, how should we understand the rise of the US dollar index? By the way, an explanation is needed: First, the increase in the number of overnight reverse repurchases by the Federal Reserve does represent an increase in the Federal Reserve’s excess deposit re

Niu Wenxin, chief commentator of "China Economic Weekly"

Some people say: The decline of US stocks and US bonds means that capital is flowing out of the United States. But if this is the case, how should we understand the rise of dollar index ? This seems to be a contradictory trend. How do you view this phenomenon? In addition to market trends, everyone needs to see: The amount of overnight reverse repurchases by the Federal Reserve continues to rise, and now it has actually reached around 2.3 trillion yuan.

An explanation is needed by the way: First, the increase in the number of overnight reverse repurchases by the Federal Reserve does mean an increase in the Federal Reserve's excess deposit reserves, but this is a process of expanding the balance sheet, not shrinking the balance sheet , which just shows that the liquidity of the US financial market is too large , so large that the cash in the hands of financial institutions has no place to go, so they have to temporarily deposit it in the Federal Reserve; secondly, overnight deposits are deposited before the market closes the previous day and explained before the market opens the next day, which does not affect the liquidity of the US financial market at all; thirdly, On June 17, 2021, the Federal Reserve announced that it would increase its overnight reverse repurchase interest rate from 0 to 0.05%. This is the key reason why Wall Street financial institutions will participate more in the Federal Reserve's reverse repurchase transactions with idle funds. Therefore, some people simply interpret the increase in the number of overnight reverse repurchases by the Federal Reserve as " currency withdrawal " and equate it with the increase in China's statutory deposit reserves. This is a huge misunderstanding.

Combined with the sharp increase in the number of overnight reverse repurchases by the Federal Reserve, how to understand the paradoxical phenomenon that U.S. stocks and U.S. bonds are falling while the U.S. dollar index is rising? In fact, the decline in U.S. stocks and U.S. bonds only means the withdrawal of investment, but does not mean the flight of capital. The funds withdrawn from the stock market and bond market still remain in the accounts of U.S. financial institutions, thus turning into huge cash liquidity, which is used every day. Depositing into a Federal Reserve account turns into an overnight reverse repurchase, allowing slight risk-free arbitrage to reduce cash holding costs .

Now, the United States will never dare to create a capital spillover market situation, because it must rely on the appreciation of the US dollar to lower domestic prices. Everyone should see that most general consumer goods in the U.S. market rely on imports, so "Trump's tariffs" actually contribute to the rise in U.S. prices. what to do? On the one hand, the U.S. government needs to reassess the "Trump tariffs" and minimize its impact on U.S. prices; on the other hand, the Federal Reserve needs to raise the U.S. dollar exchange rate, strengthen the purchasing power of the U.S. dollar, and thereby stabilize domestic prices.

Now, the United States is doing this. A key demand for substantial interest rate hikes is actually to use the expectation of rising interest rates to push up the U.S. dollar index, and use the appreciation of the U.S. dollar to lower prices. Of course, in order to better achieve its goals, the United States provoked the Russia-Ukraine conflict, disrupted Europe, drove out European capital, and used this to lower the value of the euro and relatively push up the dollar. Another is to cause trouble in Asia and prevent international capital from flowing to Asia.

Given that the U.S. consumer goods market relies heavily on China. Therefore, in the context of the need to vigorously suppress prices, the United States probably does not want the RMB to appreciate against the U.S. dollar now more than ever in history, but rather wants the RMB to depreciate against the U.S. dollar. Because the appreciation of the U.S. dollar and the depreciation of the RMB will make it cheaper for the United States to purchase Chinese goods.

The question is: When the US dollar appreciates, will the RMB inevitably depreciate against the US dollar? I have said many times: The appreciation of the US dollar generally reflects the rise of the US dollar index, but because the RMB is not among the basket currencies of the US dollar index. Therefore, if the U.S. dollar index rises, the RMB may not necessarily depreciate relative to the U.S. dollar. As shown in the figure above, although most of the time, the U.S. dollar index and the RMB exchange rate against the U.S. dollar do have a "negative correlation" trend, a "positive correlation" trend also exists for a longer period of time. For example, from 2011 to 2013, and from the end of 2020 to the beginning of 2022, the U.S. dollar index rose, and the RMB also appreciated against the U.S. dollar at the same time.

How to choose RMB now? Even if the United States wants the RMB to depreciate against the U.S. dollar in order to suppress prices, is there sufficient reason for the RMB to depreciate? First, China's trade surplus is still very large; second, the enthusiasm for foreign capital inflows into China is not decreasing, but increasing; third, China's economic future expectations are far better than those of Europe and the United States. Under such circumstances, the only way is for the United States to cancel the "Trump tariffs".Of course, there is another way to create depreciation pressure on the RMB against the US dollar, which is for China to increase export tariffs to the United States.

Editor-in-Chief: Yao Kun

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