On July 25, after more than four months of continuous decline, the U.S. dollar index finally fell below the important integer mark of 94 and closed at 93.600. The U.S. dollar also fell below the lowest level of 94.632 formed when the COVID-19 epidemic first broke out on March 9 t

Ran Xuedong

html On July 25, after more than four months of continuous decline, the U.S. dollar index finally fell below the important integer mark of 94, closing at 93.600. The U.S. dollar also fell below the lowest level reached when the new crown epidemic first broke out on March 9 this year. Bit 94.632.

After the U.S. dollar index breaks through this mark, if we look at the trend of the U.S. dollar, there will be no room for decline. The next stronger support level is the lowest point of 88 points set in February 2018. Will the US dollar continue to fall sharply? There are more and more traders who are bearish.

Some research institutions believe that the US dollar may fall by about 30% in the future, reaching a level of around 70. This conclusion is drawn from the fact that the past few rounds of declines in the US dollar have stopped at around 70 levels. Of course, this way of thinking is relatively static and cannot be logically self-consistent.

The key question is to find the reason for the sharp decline of the US dollar. First of all, the large fiscal deficit in the United States and the extremely loose monetary policy implemented by the Federal Reserve are unconvincing, because the US dollar index is based on other factors. When comparing the currency values ​​of non-U.S. currencies, COVID-19 has swept the world, and major developed countries have implemented large-scale monetary easing and fiscal stimulus measures. This has the same impact on almost all currencies, and the U.S. dollar cannot be compared with other currencies because of this. Currency depreciation.

The more fundamental logic that leads to the devaluation of the US dollar is the rise in the value of non-US currencies, the most important of which are the euro, Japanese yen, pound sterling, Swiss franc, etc., especially the strengthening of the euro, which is decisive for the weakening of the US dollar, because The euro holds the largest share of the U.S. dollar index.

Why is the euro strong? There have been significant changes in major European economic fundamentals and fiscal and monetary management policies. Data show that after the COVID-19 epidemic was brought under control, the European economy recovered better than the United States.

In the United States, output in the services sector fell for a sixth straight month as businesses faced a wave of coronavirus cases, leading to new restrictions in several states. The U.S. Composite Purchasing Managers Index (PMI) rose to 50 from 47.9 in June, indicating that economic activity has plateaued after five months of contraction. But the recovery has been extremely weak.

And the euro zone composite PMI surged to 54.8 from 48.5 in June, indicating that economic activity was growing at the fastest pace in more than two years after four months of contraction.

The most important difference in economic performance between Europe and the United States is the huge gap in the effectiveness of epidemic prevention and control between Europe and the United States. The epidemic in Europe was relatively severe in the early days, but since then all countries have implemented strict prevention and control measures, resulting in the epidemic quickly easing. However, although the epidemic control in the United States was good in the early stage, there was a serious second round of rebound in the later period, which nipped the economic recovery in the bud. The recurrence of the epidemic in the United States may be related to the police-citizen conflicts that occurred in the previous few months.

The rebound of the European economy will lay the foundation for the remaining recovery in the second half of this year and will promote the expansion of the global economy. The second wave of the epidemic in Europe is currently far less severe than that of the United States. Future economic recovery depends entirely on epidemic prevention and control. The more severe second round of rebound in the epidemic in the United States has led to a weakening of financial confidence in the future development of the U.S. economy and public relations management in American society.

Most people link the strength of the U.S. dollar to the fundamentals of the U.S. economy. If the fundamentals are good, the U.S. dollar will rise, and if the fundamentals are weak, the U.S. dollar will fall. This way of thinking is still isolated and static, not relative. The strength of the U.S. dollar index is mainly determined by the strength of other currencies. For example, the financial crisis broke out in the United States in 2008. Almost all analysts believed that the U.S. dollar would definitely depreciate sharply. However, at that time, the U.S. dollar index started from the lowest point of 72.1 in April 2008. On the upside, the U.S. dollar index reached a high of 102 in December 2016.

Why this situation occurs? The main reason is that despite the Wall Street financial crisis in the United States, the real financial risk is in Europe, from the bankruptcy of Northern Rock Bank in the UK to the debt crises in Greece , Italy and Cyprus and other countries, which have triggered years of The European debt crisis has also exposed the inherent flaws of the euro zone's fiscal and monetary policies.

After the U.S. dollar reached a double top from its highest point of 119 in February 2002, the U.S. dollar index showed a trend of decline. The lowest point of this round of U.S. dollar index decline was 72.1 in April 2008, which was a 39% drop from the highest point. During this period, the U.S. economy was taking off due to the new Internet technology revolution. The fundamentals of the U.S. economy were quite good, but the U.S. dollar was falling.

The general trend of this round of global economy is that the COVID-19 epidemic is gradually under control, especially in the major economies of Europe, Japan, South Korea, and China. The COVID-19 epidemic is well controlled, better than that in the United States. This has caused people's confidence in the United States' social and public management capabilities to be shaken. Trump ’s previous crazy words and deeds are corroborated by the control of the epidemic, which further weakens people’s trust in U.S. dollar assets.

In addition, EU leaders have reached an agreement on a "recovery fund" totaling up to 750 billion euros, which means that the EU will begin to implement the largest economic rescue plan in history, of which 500 billion euros will be distributed in the form of direct grants to economically affected countries. For severely affected member states, the recipient countries do not need to repay, and the remaining 250 billion euros will be disbursed as loans. The achievement of the

recovery fund shows that European leaders have fully understood the shortcomings of the euro and have found quite effective remedies, which is to move from monetary unification to gradual fiscal unification.

From the European debt crisis, the EU's agreement on the EU Recovery Fund means that Europe has made an important breakthrough in fiscal integration, which means a more united EU and a more optimistic economic outlook for Europe, which will support the euro. And push the dollar weaker.

This situation will continue, so the dollar's decline may not end anytime soon.

Editor-in-Chief: Meng Junlian Editor-in-Chief: Ran Xuedong