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1. Amid the epidemic, the U.S. dollar has experienced sharp ups and downs.
html Since March, the trend of the U.S. dollar index can be said to be a bit "mysterious". First, it violently rose out of the 100-digit market, and then began to pull back and enter a depreciation channel. What's going on?
Since the biggest variable in this year’s macro environment is the COVID-19 epidemic, the trend of the US dollar is also inseparable from the liquidity impact and market risk aversion logic caused by the epidemic.
Since March, under the influence of the rapid spread of the epidemic and the crude oil price war, the market has been extremely pessimistic. The Federal Reserve has urgently resorted to the powerful medicine of "zero interest rate + unlimited QE", but this powerful medicine has confirmed investors' concerns about the economic situation. Very bad guess.
The plummeting stock market and panic selling have turned into a liquidity crisis, and risk aversion has sharply increased. The US dollar, as the global reserve currency, is regarded as a safe haven asset and has become increasingly popular. This breaks the reaction loop in which the dollar should depreciate after the Federal Reserve cuts interest rates. In mid-March, the U.S. Index experienced a wave of gains, reaching its highest level approaching the 103 mark.
Next, the Federal Reserve worked tirelessly to flood the market, easing market liquidity risks, risk aversion improved, and the U.S. dollar returned to the logic of depreciation under loose money.
Image source: Zitu.com
It can be said that during the epidemic, risk aversion was the dominant factor in the trend of the US dollar. From this, we can also infer that if the epidemic does not reach a clear turning point or continues to worsen, the buying demand for the US dollar will rise, which will push the US dollar index to fluctuate at high levels. But in the medium to long term, after the epidemic, the U.S. dollar will enter a depreciation channel, and this is not only related to the Fed's massive release of water.
2. The switch for mid- to long-term depreciation of the U.S. dollar has been turned on.
The market risk aversion caused by the epidemic is itself short-term, and the mid- to long-term trend of the U.S. dollar will still return to factors such as monetary policy and U.S. economic fundamentals. There are three main reasons why the U.S. dollar has turned on the long-term weakening switch:
The first is of course the Federal Reserve's loose monetary policy .
Since March, the Federal Reserve has launched unlimited quantitative easing, injecting a large amount of U.S. dollars into the financial market; in addition, due to the decline in global capital markets and commodity prices and the reduction in trade volume caused by the epidemic, the liquidity of the U.S. dollar, as the world's major settlement currency, has For this reason, the Federal Reserve has also established currency swaps with other major central banks to release US dollars internationally.
These additional U.S. dollars will eventually flow to the market, and when economic growth cannot absorb the excess U.S. dollars, the U.S. dollar will inevitably depreciate.
In fact, the data has confirmed this trend. As of May 18, the U.S. broad money M2 growth rate rose to 23% year-on-year, setting a new high since 1944. At the same time, the IMF predicts that U.S. economic growth will shrink by 5.9% this year. The currency growth rate far exceeds the economic growth rate, which means that the U.S. dollar is seriously overissued and the U.S. dollar itself will depreciate significantly.
(U.S. broad money M2 has grown significantly)
Second, there is pressure from the U.S. finance.
For a long time, the U.S. Treasury Department and the Federal Reserve have been supporting each other like two drunkards - the Treasury Department creates deficits to stimulate the economy and needs to issue U.S. debt to raise funds to avoid bankruptcy, while the Fed prints money to buy these government bonds, and at the same time, in order not to If the U.S. government defaults and destroys the country's credit, it will use loose monetary policy to depreciate the U.S. dollar to dilute debt and allow other countries to pay for U.S. economic development.
In order to save the economy hit hard by the epidemic this time, the U.S. Treasury Department has continuously launched stimulus plans and plans to issue nearly 3 trillion U.S. dollars in U.S. Treasury bonds in the second quarter, which will set a record for the scale of bond issuance . Most Wall Street financial institutions believe that the Federal Reserve will still be the largest "takeover" of U.S. debt this time.
The U.S. government's liabilities continue to expand, and the demand for a devalued U.S. dollar has only increased, which also determines that the U.S. dollar cannot continue to appreciate.
(The United States has been in fiscal deficit for a long time)
Third, the economic recovery of the United States after the epidemic requires a weak dollar.
After the epidemic, economic recovery will become the most important issue. The United States will most likely seek a weak dollar to stimulate U.S. exports and encourage Americans to use locally made products instead of imported products, thereby assisting the development of U.S. companies. Promote maximum employment.
At the same time, the White House authorities have been emphasizing on reducing the US trade deficit. If the dollar strengthens, it will further hit exports, which is what the US government does not want to see.
(The United States has been in a trade deficit for a long time, and a stronger dollar will further impact its exports)
3. Dissatisfied with being sheared, there is an undercurrent of global "de-dollarization"
Since the establishment of the Bretton Woods system in 1944, the dollar has replaced Pound Sterling, the world monetary system has entered the dollar era. To this day, the U.S. dollar remains the world’s largest currency.
As of the end of 2019, the U.S. dollar ranks first in the global central bank’s foreign exchange reserves, accounting for 60.9%; about 40% of global trade outside the United States is denominated and settled in U.S. dollars; nearly 60% of U.S. dollar banknotes are used as global A store of value and medium of exchange that circulates internationally.
(Chart of currency changes in global central bank foreign exchange reserves from 1994 to 2019, the green line is the US dollar, source wikipedia)
In recent years, these data have not changed significantly, which proves that the hegemony of the US dollar is still strong, and the depreciation of the US dollar and other The national wool scheme is still the "harvester" used by the United States to plunder the world's wealth.
However, under the shadow of the epidemic, the U.S. economy has shrunk and supply has decreased. The Federal Reserve’s unprecedented large-scale water injection and the subsequent long-term depreciation of the U.S. dollar may excessively consume U.S. dollar credit and pose financial risks to other countries. This will inevitably force some countries to accelerate the "de-dollarization" process.
For example, Cambodia , recently because the central bank has been unable to implement expansionary economic policies to regulate the country's economy, in order to save companies, it has to call for "de-dollarization" and call on citizens to return to the national currency riel.
In fact, the world has suffered from the US dollar’s hegemony for a long time. The so-called devil is always in the details. The trend of "de-dollarization" has already been undercurrent around the world.
First of all, since the second half of 2018, the gold reserves of global central banks have increased significantly. More than a dozen countries are withdrawing their gold reserves in the United States. For example, Germany has withdrawn more than 1,000 tons of gold, and Russia has withdrawn 80 % of gold. After the "gold content" of the US dollar declined, gold, the ancient natural currency, shines again.
In addition, March data shows that 35 countries in the world have begun the process of de-dollarization. 16 oil-exporting countries bypass the U.S. dollar for settlement, and Venezuela and Iran have established independent settlement systems. 21 of the 35 U.S. creditor countries are reducing their holdings of U.S. debt, and China is one of them. From commodity pricing and international trade settlements bypassing the U.S. dollar to the sell-off of U.S. debt, the building of U.S. dollar hegemony has begun to shake.
At the same time, the US dollar also faces a fierce rival-the sovereign cryptocurrency . Different from Bitcoin, Ethereum, etc., sovereign cryptocurrencies have underlying assets and are endorsed by the central bank of the country. In essence, they are sovereign currencies similar to banknotes.
Currently, China has launched DCEP, becoming the world’s first digital legal currency. The Bank for International Settlements' 2020 survey results show that 10% of central banks around the world are already considering issuing legal digital currencies in the short term, which will accelerate the process of replacing the US dollar-based settlement and clearing methods and systems.
4. A story about how the U.S. dollar will eventually be replaced.
In 2011, former U.S. Secretary of State Kissinger said at the Global Think Tank Summit held in Beijing, "I want to tell a story today, which is the story of the U.S. dollar replacing the British pound. This is a long story. historical process".
The background of this sentence is that the United Kingdom established the hegemony of the pound using the gold standard in 1821. In 1874, the total economic output of the United States surpassed that of the United Kingdom. However, it was not until 1944, 70 years later, after the Bretton Woods system, that the U.S. dollar officially replaced the pound. Becoming the world's largest currency is a long process.In other words, the power that the U.S. dollar has built over the years cannot be overturned so easily.
Image source: Historyczny ambasador
Indeed, due to network effects and path dependence, even if an emerging international currency emerges, it will be difficult to replace the US dollar in a short period of time.
However, global "de-dollarization" is an indisputable fact. This is not only because of the many dissatisfaction of various countries with the "dollar harvester" mentioned above, but also because the United States' leadership voice in the world is constantly being eroded.
In recent years, the United States has embarked on the path of "anti-globalization", often "withdrawing" if it disagrees, abusing economic sanctions, increasing tariffs, freezing US dollar assets, and going further and further on the road to decoupling the U.S. economy and finance from the world. This further accelerates the global process of getting rid of the hegemony of the US dollar.
Behind the changes in the global currency landscape are changes in the growth pole of the global economy and changes in international discourse power. In the process of vicissitudes of life, currency will inevitably experience the survival of the fittest.
If the U.S. government continues to insist on its own way, the hegemony of the US dollar will inevitably come to an end, and a new era of currency that is more multipolar, or dominated by super-sovereign cryptocurrencies, will eventually arrive. The US's release of water during this epidemic and the subsequent depreciation of the US dollar will all be part of the story.
