Since the beginning of this year, the US dollar has risen sharply, and the index has hit a new high in more than 20 years. From the lowest point in 2009 to the current increase by more than 50%, and the third round of the US dollar super cycle has finally arrived. What are the driving factors for the US dollar to enter a super cycle in this round? What impact has the dollar super cycle had on global financial markets in history? How long can this round of US dollar super cycle last? This article analyzes the above problems.
#01
The driving factor behind the US dollar super cycle
Since the second half of 2021, the US dollar index has soared from around 90, and its high point has approached the 115 mark at one point. The increase in one year is about 30%, and it has appreciated by 50% from this round of lows. In my opinion, behind the third round of the dollar super cycle, the following three factors are mainly driven by the following three factors:
first, high inflation forces Fed to aggressively raise interest rates , and the US economy is also resilience beyond expectations. Although the Federal Reserve significantly lowered its economic growth forecast and raised its unemployment rate forecast in September, the fundamentals of the US economy are very resilient in this round of interest rate hike cycle . Taking the most popular non-agricultural employment as an example, the United States added 263,000 new non-agricultural employment in September, exceeding market expectations. According to the sub-item, the number of employment in service industries such as education and medical care (90,000), leisure accommodation (83,000), and commercial services (46,000). Meanwhile, the unemployment rate fell from 3.7% last month to 3.5%, the lowest level in more than fifty years.
Overall, the supply and demand contradiction in the US labor market has not improved significantly. In addition, the United States' dependence on energy imports is much lower than that of developed economies such as EU and Japan. The impact of rising global energy prices on the US economy is relatively limited. After the shale gas revolution in 2009, the proportion of energy consumption in the United States in private consumption has dropped significantly. In the past two years, the price increase of natural gas in the United States has been much lower than that in Europe.
Since the COVID-19 pandemic, the United States has implemented a modern monetary theory (MMT) policy. Although it effectively hedged against the impact of the epidemic and avoided the economic downturn, it ultimately failed to escape its fatal inflation injury. Since the beginning of last year, the author has been repeatedly reminding the sustainability and danger of this round of inflation in the United States, and insisting that the so-called "temporary theory of inflation" is a clear misjudgment, and the pace of tightening of the Federal Reserve is significantly lagging behind.
With the rapid economic recovery, U.S. inflation continues to heat up, forcing the Federal Reserve to continue to increase tightening efforts. In August, the core CPI and core PCE price index reached 6.3% and 4.9% year-on-year respectively, and the risk of "wage-inflation" spiral upward has not diminished. In September, the Federal Reserve raised interest rates for the third consecutive time of 75bp and significantly raised the federal funds rate forecast, which also pushed the U.S. Treasury bond interest rates to continue to rise, thereby driving the appreciation of the US dollar. As of October 7, the yields of 2-year and 10-year U.S. Treasury bonds reached 4.3% and 3.9%, respectively, both of which were the highest in more than a decade.
Second, the Russian-Ukrainian conflict triggered the energy crisis , the European economic outlook deteriorated, and euro was under pressure. Under the impact of the energy crisis, Europe is deeply in a dilemma of "stagflation". On the one hand, European inflation levels have climbed to an all-time high. In September, the euro zone CPI grew by 10% year-on-year, of which energy prices exceeded 40% year-on-year. As of October 7, Germany's natural gas prices were still close to 8-10 times the pre-epidemic average; on the other hand, high inflation seriously restricted industrial production, weakened consumer confidence, and worsened trade balances, and the risk of European economic recession increased.
html The euro zone manufacturing and service industry PMI fell further to 48.4% and 48.8% in September, at a low of at least a year and a half. In Germany, the trade difference after the seasonal adjustment in August was only 1.2 billion euros, the lowest level since 2001; in September, the IFO business prosperity index fell to 84.3%, a new low since the financial crisis (not considering the outbreak of the epidemic in 2020). Recently, four major research institutions in Germany have lowered their expectations for Germany's economic growth in 2022 from 2.7% to 1.4%, and significantly lowered their expectations from 3.1% to -0.4% in 2023.Considering that the US dollar index is mainly composed of six currencies: euro, yen, pound, Canadian dollar, Swedish kroner , Swiss franc (the weight of the euro is close to 60%), the increase in the US dollar against the above currencies can also reflect to a certain extent the differentiation between the US economy and developed economies such as Europe.According to the author's calculations, since the beginning of this year, the US dollar has risen 17% against the euro, the US dollar has risen 22% against the pound, and the US dollar has risen 23% and 8% against the Swedish kroner and the Swiss franc respectively, indicating that the US dollar has appreciated significantly against the European currency ; in addition, the US dollar has risen 27% against the Japanese yen, and the US dollar has also risen 9% against the Canadian dollar.
Third, geopolitical conflicts continue to escalate, pushing up the demand for safe-haven by the US dollar. , which has lasted for about 230 days, has shown an escalation trend. The conflict between Russia and Ukraine has become increasingly fierce since the Russian President Putin announced a partial mobilization on September 21. On October 8, the of the Crimea Bridge exploded, and on October 8, Russia launched an air strike on Ukraine. In addition, the "North Stream" pipeline leaked again in late September, and the uncertainty of European energy supply increased. Overall, global geopolitical conflicts continue, and the US dollar, as a safe-haven currency, is sought after and supports the US dollar exchange rate.
#02
The dollar super cycle is often accompanied by crisis
Since the early 1970s, the Bretton Woods system has disintegrated, and the gold standard has been transferred to the US dollar standard for more than 50 years. The dollar cycle has been closely related to the drastic changes in global capital flows. According to historical experience, the US dollar's super appreciation cycle is often accompanied by turmoil in financial markets or even crises. In my opinion, this phenomenon is not a coincidence. Generally speaking, the sharp surge in the US dollar in the short term often faces rapid withdrawal of funds from other markets, thus becoming the fuse of the crisis.
Specifically, since the early 1970s, the US dollar has experienced three super appreciation cycles:
The first round of the dollar super cycle (1980-1985): In order to get rid of the unprecedented "big stagflation", Paul Volker took office as chairman of the Federal Reserve in 1979, vigorously raising interest rates, and also pushed the United States into a strong era of US dollar. In March 1985, the US dollar index once broke through the 160 mark, up more than 90% from the 1980 low.
However, the global financial market was turbulent during the same period, and the most famous one was the Latin American debt crisis. Although excessive foreign debt is an inherent factor in the outbreak of the Latin American crisis, the influx of funds caused by the weak dollar earlier and the massive withdrawal of funds after the strong return of the dollar became the accelerator of the crisis, thus putting Latin America into a sustained debt crisis.
The second round of US dollar super cycle (1995-2001): The full outbreak of the US Internet economy caused the US dollar to enter a rising cycle in 1995. In July 2001, the US dollar index once rose above 120, an increase of nearly 50% compared with the low in 1995. At that time, the information technology revolution led by the United States attracted a large amount of funds to flow back to the United States and participated in direct investment and securities trading.
During the same period, a large amount of international capital flow back to the United States also exacerbated capital outflows in other markets, the most famous of which was the Asian financial crisis from 1997 to 1998. At that time, the depreciation of the Thai baht was used as the fuse. The financial crisis swept Malaysia , Singapore , Japan and South Korea, causing the economic and financial systems of Asian economies to suffer heavy damage.
Starting from 2009, the US dollar entered a new round of upward cycle, with a slow rise in the previous period, and this year it evolved into a super cycle: Some market believes that the US dollar rise cycle should start from the 2014 Fed rate hike expectation that the US dollar rebounded strongly, but we tend to count the starting point of this cycle from the lowest point of the US dollar in 2009.
The reason is that domestic selling of US dollar assets was growing at that time, but the author proposed that the US dollar was already at a low point and should be wary of the US dollar reversal. As the financial crisis spread to other countries, the US dollar rebounded until the Federal Reserve relaxed its three rounds of quantitative easing that the US dollar weakened, but it still did not fall below the previous low. During the period from 2014 to 2016, the US dollar was expected to rise sharply with the expectation of interest rate hikes, which once again triggered a sharp depreciation of the non-US dollar exchange rate. In 2022, the US dollar rose sharply under the influence of multiple factors, and this round of US dollar rise cycle eventually evolved into the third super cycle.
Once the US dollar enters a super cycle, it will have a profound impact on the global economy. The first round of the dollar super cycle caused Latin America to fall into a debt crisis, the second round of the dollar super cycle triggered the Asian financial crisis, and the current third round of the dollar super cycle is deeply impacting Europe.Coupled with the impact of the Russian-Ukrainian conflict, the euro and pound exchange rate continue to depreciate. Since late September, the euro has continued to run below the parity line, hitting a new low in 20 years; at the end of September, the pound has approached the parity line against the dollar, hitting a historical low, and is currently operating at a low of around 1.10. On the one hand, the appreciation of the US dollar makes energy and food prices denominated in US dollars more expensive; on the other hand, the sharp depreciation of the euro and the pound further exacerbates the inflationary pressure in Europe. In September, the euro zone CPI reached double digits year-on-year. Under the influence of high inflation, the European economic momentum has weakened significantly, and it is inevitable that the slide from "stagflation" to recession will be reversed in the future. At the same time, deep-seated contradictions at the European institutional level and instability in the political landscape have further weakened the future economic prospects.
Therefore, this round of US dollar super cycle will exacerbate the difficult situation in Europe. In addition, the Fed's continued interest rate hike has triggered a wave of global interest rate hikes. Sweden, Hong Kong, the United Kingdom, Switzerland, Norway, New Zealand , Australia, Indonesia , the Philippines, South Africa, Vietnam, India, Mexico and other central banks have successively announced interest rate hikes, and the risk of debt crisis in some emerging economies cannot be ignored.
Outlook, the three major factors of the Federal Reserve's aggressive interest rate hike, the contrast between the US and Europe economics and the increase in safe-haven demand still exist, and the US dollar remains strong. In the short term, the conflict between Russia and Ukraine and the energy crisis will affect the US dollar against the euro. In the medium term, when will the US economic momentum slow down and when will the US inflation pressure ease. The author judges that it may not be possible to reverse the strength of the US dollar after the US economy enters recession in the second half of next year.
(the author of this article Shen Jianguang is the chief economist of JD Group)
