Source: Donghai Futures Research
Key points
US dollar index continues to rise and break through 110: Since Fed started this round of first rate hike in in March, the intensity and speed of the Fed hike in have gradually accelerated and increased. Affected by this, the US dollar index rose sharply, with the US dollar index rising from 95.647 at the beginning of the year to a high of 110.786 on September 7, hitting a new high in nearly 20 years, with an annual highest increase of 15%. Non-US currencies suffered a sharp drop. Among the major economies around the world, the US dollar fell by more than 25% against the yen, the euro fell by 12% against the US dollar, the pound fell by 16% against the US dollar, and the US dollar fell by more than 10% against the RMB.
Four factors support the continued strengthening of the US dollar: First, US inflation continues to soar, and the Federal Reserve continues to raise interest rates significantly and rapidly; in addition, with the Federal Reserve's shrinking balance sheet , the Federal Reserve's currency tightening strength is the top of the world's major central banks. Second, the macro fundamentals of the United States and the United States are much better than other major economies. Currently, Europe is in a deep energy crisis, Japan is in a deep exchange rate depreciation crisis, and China's economic growth rate has slowed down significantly due to the epidemic. Third, U.S. Treasury yields continue to soar, and the bond yields against the United States, Germany, the United States and Japan, and the United States and China continue to expand, and global funds and capital flow into the United States. Fourth, the US economic growth slowed down, import demand slowed down, coupled with increased energy exports, the trade deficit of narrowed, and the liquidity of the US dollar flowing into the world through the trade deficit has also been greatly reduced, causing offshore dollar tension and boosting the US dollar to rise sharply.
Conclusion: The current US economy is still relatively strong, the US inflation pressure is still high, the Federal Reserve has to continue hiking interest rates to curb inflation, Europe is still in a deep energy crisis and the winter may be more severe, China's pressure to stabilize the economy is still high, and monetary policy continues to be loose, so the US dollar index is likely to continue to remain strong this year. Whether the US dollar index can show a turning point or a trend decline depends mainly on the following three factors: First, whether the US economy will experience a recession or the easing of inflationary pressure will cause the Federal Reserve to change its monetary policy position and enter a cycle of interest rate cuts. Second, the ECB has also entered a super tightening cycle to curb inflation and compete with the Federal Reserve; however, given that the European energy crisis is still severe and the economic fundamentals are weaker, the basis for a significant tightening is relatively weak. Third, whether China can get rid of the impact of the epidemic and return to medium-to-high-speed growth, whether Europe can get rid of the energy crisis, and the rapid rise of new forces such as India will weaken the overall macro advantages of the United States.
Risk factors: The conflict between Russia and Ukraine ended early, the European energy crisis eased, the US economy slowed down faster than expected or recession, the Federal Reserve's tightening slowed down or monetary policy shifted to
1
The Federal Reserve continued to raise interest rates quickly and significantly
Since the beginning of this year, due to the outbreak of the conflict between Russia and Ukraine, global energy prices have risen sharply, and U.S. inflation has continued to soar. Since the Fed started its first round of interest rate hikes in March, the intensity and speed of interest rate hikes in the Federal Reserve have gradually accelerated and increased. 25BP rate hikes in March, 50BP rate hikes in May, 75BP rate hikes in June, 75BP rate hikes in July, and 75BP rate hikes in September are a foregone conclusion. In terms of balance sheet reduction, the Federal Reserve began to shrink its balance sheet from June 1, shrinking its balance sheet by US$47.5 billion per month from June to August, and the scale of the balance sheet reduction doubled after September. Affected by this, on the one hand, the yield on the US Treasury bond continued to soar, with the 10-year Treasury bonds soaring again to the level of 3.5%, the 3-month Treasury bond yield exceeding 3%, and the 2-year Treasury bond yield close to 4%. The inverted yield on the US Treasury bond has further deepened. On the other hand, the US dollar index rose sharply, with the US dollar index rising from 95.647 at the beginning of the year to the current highest of 110.786, hitting a new high in nearly 20 years. As of September 19, the annual increase was as high as 15%. Non-US currencies suffered a sharp drop. Among the major economies around the world, the US dollar once reached a high of 145 against the yen, the euro fell to a low of 0.9864 against the US dollar, the pound fell to a low of 1.13 against the US dollar, and the offshore and onshore dollar fell below the 7 level against the RMB.
Figure 1 Fed rate hike (BP)
Source: Wind, compiled by Donghai Futures Research Institute
Figure 2 Fed asset structure (unit: million US dollars)
Source: Wind, compiled by Donghai Futures Research Institute
2
US Treasury yield curve continues to invert, the probability of US economic recession increases
Because, US Treasury yield = currency policy leads to short-term interest rate fluctuations + term spread + expected long-term yield + inflation expectations. Therefore, the main factor that determines the center of US Treasury bond yields is the expected long-term yield and inflation expectations, while monetary policy mainly affects short-term interest rate fluctuations and maturity spreads determine the differences in long-term and short-term Treasury bond yields. At present, due to the continued rise in U.S. inflation, the overall rise in U.S. inflation expectations; the continued increase in the Federal Reserve's interest rate hikes led to a sharp rise in short-term interest rates; and the continued increase in interest rates on the Federal Reserve led to a decline in expected yields, as well as concerns about the US economic recession deepened, and the narrowing of credit spreads on the long-term and short-term ends, which eventually led to an inverted U.S. Treasury yields on long-term and short-term ends.
This time, the yield on the US Treasury bond continued to rise, basically hitting a new high in the past decade, especially the 10-year Treasury bond yield continued to rise. On the one hand, the risk-free yield of the US continued to rise, suppressing the valuation of the US stock market, causing a sharp decline in US stock ; on the other hand, the yield on the US 10-year Treasury bond continued to soar, causing the US Treasury yield to expand significantly compared with Germany, China and Japan, and international funds flowed into the United States, thus promoting the further strengthening of the US dollar. In addition, the yields of 2-year and 10-year U.S. Treasury bonds continue to invert, resulting in an increase in the probability of an economic recession in the United States.
2.1. US Treasury yields continue to rise
Judging from the trend of US Treasury yields, this time, US Treasury yields hit a new high in the past decade, especially the important mark of 3.5% for 10-year Treasury bonds, which are mainly due to the sharp rise in inflation expectations and the fluctuations in short-term interest rates caused by interest rate hikes, and the expected long-term yields do not rise much. Before 2001, the growth rate of the actual potential GDP of the United States (determining the expected long-term yield) remained above 3.5% for most of the time, only high inflation in the 1970s and brief years in the early 1980s were below 3.5%; plus inflation expectations, the center of the yield of the US 10-bond yield remained above 3.5% for a long time. After 2001, the potential U.S. GDP fell below 3.5% for the first time, and the U.S. 10-bond yield also fell below 3.5% for the first time in 2003. Currently, the potential GDP growth rate has been in the range of 1-2%. Therefore, whether the US 10 bond yield can exceed 3.5% depends mainly on short-term volatility and inflation expectations caused by monetary policy. From 2003 to 2008, due to the high level of US inflation and economic growth, the 10-bond yield remained above 3.5% for a long time. After the 2008 US financial crisis, the yield on the US 10 bonds has remained below 3.5% for a long time, and only rose to above 3.5% in 2009, 2010 and 2022. Among them, the United States was in a recession in 2009, and the U.S. Treasury bonds were sold off, and the yield of 10 bonds rose to above 3.5% in a phased manner; in 2010, the global economy recovered, with the rebound of US GDP2.7%, inflation expectations rebounded, and monetary easing slowed down, and the yield of 10 bonds rebounded to above 3.5% in the short term. Since then, since the potential economic growth rate of the United States has been around 1.5% for a long time and the inflation expectation target remains around 2%, it is difficult for the 10-bond yield to exceed 3.5%. This year, the yield on 10 bonds briefly exceeded 3.5%, mainly because inflation broke through the 40-year high and inflation expectations rose sharply to more than 3%. The intensity and speed of interest rate hikes were similar to those in the 1980s, resulting in large fluctuations in short-term interest rates. In the later period, as the Federal Reserve continues to raise interest rates, inflation expectations fell, and the expected long-term yields fell due to deepening recession concerns, so the 10-bond yield will also return to below 3.5%.
Figure 3 US bond yields continue to rise
Source: Wind, compiled by Donghai Futures Research Institute
Figure 4 potential GDP growth rate and long-term inflation expectations
Source: Wind, compiled by Donghai Futures Research Institute
2.2 Interest spread between US bonds and major economies around the world continues to expand
From the perspective of the yield spread between the United States and major economies around the world, the yield spread of the Treasury bonds between the United States and Germany, China, the United States, Japan and other major economies has expanded significantly, US dollar assets are more attractive, and global funds flow into the United States. Although the ECB has also started a new round of large interest rate hikes, European bond yields have also risen sharply. However, on the one hand, the magnitude and speed of the ECB's interest rate hikes are far less than that of the Federal Reserve. On the other hand, the conflict between Russia and Ukraine has further intensified the European energy crisis and worse economic fundamentals, so the interest rate spread of the 10-year treasury bonds in the United States and Germany has risen sharply. In addition, as China and the United States and Japan implement the loose monetary policy of , China's Treasury bond yields continued to decline and Japan's Treasury bond yields rebounded slightly, resulting in the spread of the 10-year Treasury bond yields of the United States and the United States and Japan, especially the U.S.-China bond yields have been inverted for ten years. Therefore, with higher returns on assets in the United States and stronger hedging utility of US dollar assets, international funds and international capital continue to flow into the United States. Among them, overseas investors' net purchases of long-term U.S. securities in the first six months of this year have reached US$541.1 billion, exceeding the full-year level of US$471.6 billion in 2021; the net inflow of international capital in the first six months of this year has reached US$761.1 billion, reaching 69% of the total net inflow of US$1,100 billion in 2021. The net inflow of overseas funds and international capital into the United States has accelerated significantly, thus further pushing the dollar to strengthen.
From a historical perspective, the trend of the Treasury bond yield spread between the United States and major economies in the world is often accompanied by the strengthening of the US dollar. From 1995 to 2000, due to the rapid development of the US Internet, the interest rate spreads of US bonds and German bonds and Japanese bonds continued to expand in a trend, and the US dollar entered a strong cycle, and the US dollar once had a conflict of 120. From 2003 to 2008, the interest rate spreads of US bonds and German bonds and Japanese bonds declined in a trend, and the US dollar entered a trend decline cycle. From 2012 to 2018, the interest rate spreads of US bonds, Chinese bonds, German bonds and Japanese bonds continued to expand in a trend, the US dollar entered a new round of strong cycle, and the US dollar index "breaks 100". From 2019 to 2020, the yield spreads between US Treasury bonds, Chinese Treasury bonds, German Treasury bonds and Japanese Treasury bonds fell rapidly due to the Fed's historic monetary easing, and the US dollar fell rapidly in the short term. 2021-To date, due to historic inflation in the United States, the Federal Reserve has continued to raise interest rates sharply, and the interest rate spreads between US bonds and Chinese bonds, German bonds and Japanese bonds continue to expand in a trend, and the US dollar index has strengthened in a trend and "breaks 110".
Figure 5 The interest rate spread of Treasury bond yields continues to expand
Source: Wind, compiled by Donghai Futures Research Institute
Figure 6 Overseas funds and international capital accelerated into the United States
Source: Wind, compiled by Donghai Futures Research Institute
2.3 The long-term and short-term yields of the United States continue to invert, and the probability of US economic recession increases
From the inverted U.S. 2-year and 10-year Treasury bond yields, this time it is mainly due to the historic inflation in the United States and the delay in cooling down, the Federal Reserve has to adopt a continuous and rapid rate hike to curb inflation. Therefore, short-term interest rates continue to soar, especially the 2-year treasury yield reaches a level of nearly 4%, while long-term interest rates have risen less than short-term interest rates due to the decline in long-term inflation expectations and the rise in economic recession expectations. Currently, the yields of 2-year and 10-year U.S. Treasury bonds have been inverted for two and a half months in a row. Every time there is an inverted recession in history, the probability of a recession in the US economy in the next 1-2 years is basically 100%. From the historical perspective, the inverted U.S. interest rate curve is a forward-looking indicator of the inflection point of monetary policy, the inflection point of the stock market and the economic inflection point. The chronological order is: the interest rate curve inverted → the Federal Reserve stops interest rate hikes → the turning point of US stocks → the economic recession.The internal logic is that the inverted interest rate curve means that short-term loan interest rates are approaching medium- and long-term investment returns. On the one hand, banks cannot obtain profits for short payments, resulting in poor willingness to borrow from banks; on the other hand, the corporate sector has poor willingness to consume and invest because investment returns can only cover costs, which in turn affects the consumption and investment of residents and enterprises. The economy has been transmitted from half a year to a year, and the US economy has entered a period of downward and recession. To prevent this, the Fed will generally stop hikes in a short period of time; US stocks are sold out because they smell the risks of economic downturn and recession; expectations of economic downturn will be further strengthened due to the decline of US stocks until they fall into recession.
According to statistics, the U.S. interest rate curve inverted average leads the monetary policy turning point by 4.3 months: interest rate inverted appeared in the two interest rate hike cycles in 1994 and 2004 since the 1990s. On average, the Federal Reserve will stop hikes after the interest rate curve is inverted by 4.3 months. The U.S. interest rate curve is inverted on average, leading the U.S. stock inflection point for 7 months: the interest rate curve was inverted before the U.S. stock market crash in 2000 and 2007. On average, after 7 months of inverting the interest rate curve, the turning point of the US stock market appeared. Currently, due to the conflict between Russia and Ukraine, US inflation rose rapidly in March, and US stocks fell ahead of the inversion of the interest rate curve. The U.S. interest rate curve is inverted and leads the U.S. recession by 13.2 months: the interest rate curve has been inverted before all the recessions in the U.S. since 1976. On average, the interest rate curve is inverted by 13.2 months later. In this round of interest rate hike cycle, the first inversion occurred due to rapid and substantial interest rate hikes was on July 6, 2022. According to the historical average time, the Federal Reserve may stop hikes at the end of the fourth quarter of 2022, but due to the high pressure on this round of inflation, it is not ruled out that the possibility of continuing interest rate hikes next year is not ruled out; the turning point of US stocks should have occurred in the first quarter of 2023, but the conflict between Russia and Ukraine caused US inflation to rise beyond expectations, resulting in excessive interest rate hikes and excessive rate hikes too fast, and US stocks fell prematurely; the US economy will enter recession in the second half of 2022.
Figure 7 The relationship between the inverted U.S. Treasury yield curve and the Federal Reserve's monetary policy and the US economic recession
Source: Wind, compiled by Donghai Futures Research Institute
3
USD continues to rise and break through 110
Due to the continued rapid and sharp interest rate hikes of the Federal Reserve, the US dollar index continues to strengthen and breaks through the important 110 mark. There are four main reasons for the continued strengthening of the US dollar index: First, US inflation continues to soar, and the Federal Reserve continues to raise interest rates significantly and rapidly; coupled with the Federal Reserve's balance sheet shrinkage, the Federal Reserve's currency tightening strength is the top among major central banks in the world. Second, the macro fundamentals of the United States are much better than other major economies. Currently, Europe is in an energy crisis, Japan is in a crisis of exchange rate depreciation, China's economic growth rate has slowed down significantly due to the epidemic, while the United States is relatively much better. Third, US Treasury yields continue to soar, and the interest rate spreads on bond yields to the United States, Germany, the United States and Japan, and the United States continue to expand, the attractiveness of US dollar assets has increased greatly, and global funds and capital flows into the United States. Fourth, the US economic growth rate slowed down, import demand slowed down, coupled with increased energy exports, the trade deficit narrowed, and the liquidity of the US dollar flowing into the world through the trade deficit has also decreased significantly, causing offshore dollar tension and boosting the US dollar to rise sharply.
3.1. The US dollar index breaks through 110 Historical Review
There were only two times in history when the US dollar broke through 110, namely the Paul Volker period in the 1980s and 2000-2002.
html reached above 110 in the 080s, mainly due to the Second Oil War that caused hyperinflation in the United States. Paul Volker curbed inflation by raising interest rates significantly. The United States experienced recession in 1980 and 1982. However, since then, because the United States solved the inflation problem, the economy recovered rapidly again and was ahead of the world. The Federal Reserve is still in a cycle of forced interest rate hikes, and the US dollar index continued to rise to a historical high of 164. In 1984, the US economy peaked and fell, and the current account continued to deteriorate. The Federal Reserve entered a cycle of interest rate cuts in September and cut interest rates quickly, and the US dollar index also began to peak.On September 22, 1985, the finance ministers and central bank governors of five Western countries held a meeting at , the Plaza Hotel in New York. The participants unanimously believed that the US dollar was seriously overvalued and agreed to promote the depreciation of the US dollar by joint intervention in the foreign exchange market. They reached the " Plaza Agreement " to intervene in the foreign exchange market, adjust the foreign exchange rate, and use the exchange rate to adjust the trade imbalance problem. The US dollar index fell trend and the corresponding rise of the yen.2000-2002, the US dollar index once again broke 110 and reached 120. In the 1990s, Japan gradually declined due to the active puncture of the real estate bubble, with drastic changes in Eastern Europe, and the collapse of the Soviet Union. The US economy, politics and military were in an absolute leading position in the world. The overall strength of the United States has been on the rise, at its peak. In addition, during the Internet bubble, the US economy was booming and the Federal Reserve entered a cycle of interest rate hikes. Therefore, the US dollar index once again broke through 110 to 120. But in 2000, due to the continued interest rate hikes by the Federal Reserve, the US Internet bubble burst, US stocks plummeted, the US economy fell into recession, and the US dollar index peaked. However, after 2002, the global macroeconomic landscape underwent tremendous changes, which affected the trend of the US dollar index. The bursting of the Internet bubble and the "9/11 incident" have had a major impact on US economic growth and stock markets, and have caused the Federal Reserve to enter a cycle of interest rate cuts and remained loose until at least 2004. In addition, the easing of Sino-US relations after the "9/11 Incident" and China's joining WTO brought about a period of rapid economic growth in China and the global economy, and the advantage of US economic growth has declined compared to global. The combined effect of these factors has led to a trend decline in the US dollar index since March 2002.
Figure 8 historical trend of the US dollar index
Source: Wind, compiled by Donghai Futures Research Institute
3.2. Medium- and long-term US dollar trend analysis
This year, the US dollar index once again broke through the important 110 mark, mainly due to the global macro advantages moving closer to the United States again, the conflict between Russia and Ukraine led to the outbreak of the European energy crisis, Europe was damaged by the bones, and the euro was suppressed again; due to the epidemic, China's economic growth slowed down sharply; the Japanese bond market bubble burst, the yen depreciated sharply; global funds flowed to the United States. Coupled with the historic high inflation in the United States, the Federal Reserve has adopted a rapid and significant interest rate hike, and the US dollar index once again broke 110 and headed straight to 120.
The current US economy is still relatively strong. Judging from the structure of the US Treasury yield curve, the probability of a recession this year is not high; the inflation pressure in the United States is still relatively large, and core inflation will be difficult to alleviate in the short term; the Federal Reserve has to continue hiking interest rates to curb inflation; Europe is still in the energy crisis and the winter may be more severe; China's pressure to stabilize the economy is still relatively large and monetary policy continues to be loose; therefore, the US dollar index is likely to continue to remain strong this year. Whether the US dollar index can show a turning point or a trend decline in the later period depends mainly on the following three factors: First, whether the US economy will experience a recession or the easing of inflationary pressure will lead to the Federal Reserve changing its monetary policy position and entering a cycle of interest rate cuts. Second, the ECB has also entered a super tightening cycle to curb inflation and compete with the Federal Reserve; however, given that the European energy crisis is still severe and the economic fundamentals are weaker, the basis for a significant tightening is relatively weak. Third, whether China can get rid of the impact of the epidemic and return to medium-to-high-speed growth, whether Europe can get rid of the energy crisis, and the rapid rise of new forces such as India will weaken the overall macro advantages of the United States.
Figure 9 Medium and long-term US dollar trend judgment
Source: Wind, compiled by Donghai Futures Research Institute
This article comes from the financial industry
