After the Fed's interest rate meeting this week, as market expectations, raised interest rates by 3% 24%; and maintaining the "eagle-oriented" position, it will continue to actively raise interest rates before the end of the year, and the interest rate hike may reach 125 basis points. As the pace of interest rate hikes is still very aggressive, the US dollar has further strengthened. The US-Hong Kong Stock Exchange Index reached a highest of 111.81 points, setting a new high in more than 20 years.
Of course, the Fed's active interest rate hike has widened the rate spread of , which is one of the main reasons for supporting the US dollar to make good money. In fact, based on the latest interest rate spread changes between major foreign currencies and US dollar interest rate futures, it can be seen that the market expects that the official interest rate of many major foreign currencies will still have a wide negative interest rate spread than US dollar interest rates by the end of this year, and the change in interest rate spreads over the past month can be seen to have different degrees of widening, which means that the interest rate spread factor continues to support the US dollar to maintain its strength (Figure 1).
Figure 1: Reduced expectation spread of interest rates for individual currencies and US dollar futures
In addition, the factor of emerging markets leveraging also brings an additional boost to the US dollar trend. After the financial tsunami, the Fed launched four rounds of quantitative easing (QE), causing its balance sheet to surge by $8 trillion and also create a large amount of liquidity to flow in the financial market. Among them, a lot of liquidity becomes credit and flows into different countries, especially emerging markets.
According to the Bank for International Settlement (BIS) figures, from mid-2009 to the first quarter of this year, credit for non-financial institutions in emerging markets surged by more than $60 trillion (nearly three times), which is more than the increase of approximately $46 trillion (45%) in advanced economies during the same period. This also explains why during the Fed's quantitative easing period, emerging market credit often showed good growth. In other words, the Fed has released money and a lot of funds flowed into emerging markets, which has significantly increased its corporate leverage level. Of course, it is also because of this that the economy of emerging markets has relatively rapid growth. The problem is that when the Fed collects the money, the pressure on emerging markets to pay back money cannot be ignored.
In fact, if you observe the changes in the aforementioned emerging market credit growth and the U.S. Air Index, it can be seen that the two are very close, and the correlation coefficient reaches a high level of -0.65 (Figure 2). In other words, when the Fed is liberalized, the borrowing level in emerging markets rises (i.e., Leveraging), because of the flow of funds, the US dollar often performs relatively weakly; but when emerging markets enter the Deleveraging state (i.e., debt reduction) state (as it is currently), funds will flow back to the United States and indirectly support the US dollar trend.
Figure 2
From this point of view, as the Fed will actively raise interest rates in the short term, and emerging markets enter the deleveraging stage, the debt repayment process indirectly further pushes up the US dollar price, making the US dollar strong for a long time.
text/Caizhifang
