Chief Economist and Dean of Zhixin Investment Research Institute, Chairman of China Chief Economist Forum Lian Ping
Deng Zhichao, Secretary-General of Zhixin Investment Research Institute
Since 2020, the U.S. dollar index has experienced a round of plummeting to soaring, and then again The downward shock operation process. With the development of the new crown epidemic and the progress of the US election, people from all walks of life are paying increasing attention to the US dollar index. Regarding the mid- to long-term trend of the U.S. dollar, market views are roughly divided into two schools. A pessimistic view is that the U.S. dollar may experience a substantial depreciation in the near future, and some even predict that the U.S. dollar index will plummet by 35% in 2021. A more optimistic view is that the hegemony of the US dollar cannot be fundamentally shaken in the short term, and the US dollar index may continue to strengthen in stages. But no matter which view, it seems that the US dollar does have downward pressure on the trend. Based on the analysis of various factors, under the great global changes, the U.S. dollar is likely to enter a period of sustained depreciation at a relatively large scale in the future.
1. The dollar effect of the declining global importance of the U.S. economy
The U.S. dollar index is an indicator that comprehensively reflects the exchange rate of the U.S. dollar in the international foreign exchange market. It is used to measure the degree of changes in the exchange rate of the U.S. dollar against a basket of currencies. The weighted currency proportions in its composition are the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%), Swiss franc (3.6%), etc. In fact, the trend of the U.S. dollar index reflects changes in the global importance of the U.S. economy. As the world's demand for U.S. goods and U.S. dollar assets increases, the global importance of the U.S. economy will increase, and the U.S. dollar index will rise, and vice versa. This can be confirmed by the fact that the changes in the global share of US GDP are highly consistent with the trend of the US dollar index, and that the former has obvious leadership.
uses the ratio of the current price of U.S. GDP to global GDP to represent the U.S. economy’s global share. It can be found that the fluctuations of the U.S. dollar index are almost consistent with the trajectory of this indicator. In the late 1960s, after Japan and Europe experienced post-war recovery and reconstruction, their economies climbed rapidly, and their trade surplus with the United States continued to expand. Correspondingly, the global share of the U.S. economy declined rapidly, from 39.61% at its peak to 1980. 25.45% of the year. During this period, the Bretton Woods monetary system collapsed, and the U.S. dollar index fell sharply, from 111.12 to 85.82. After that, the United States entered the Reagan administration, the economy grew rapidly, and then Federal Reserve Chairman Volcker implemented tightening monetary policies. The global share of the U.S. economy and the U.S. dollar index both returned to high levels, and the U.S. dollar index reached a record high of 164.72 in 1985. After that, the global share of the U.S. economy and the U.S. dollar index bottomed out in 1995, reaching 24.73% and 84.76 respectively. At the beginning of the 21st century, the Internet bubble pushed the U.S. economic global share up again to 31.66%, and the U.S. dollar index also soared accordingly. 116.82. However, the bursting of the bubble caused the U.S. economy and the U.S. dollar index to plummet, and the outbreak of the subprime mortgage crisis in 2008 intensified this trend. Until around 2014, the U.S. economy's global share stabilized and rebounded slightly, and the U.S. dollar seemed to have entered an "appreciation cycle." After Trump came to power in 2016, the global share of the U.S. economy remained roughly at around 24%, and the U.S. dollar index also hovered slightly within the range until the global outbreak of the new crown epidemic in 2020.
Looking at the panoramic trend of the U.S. dollar index, we can find that it is precisely because of the global importance of the U.S. economy that it gives the U.S. dollar the aura of a "key international currency." The relative strength of the U.S. dollar feeds back U.S. economic growth, thus forming a mutually reinforcing cyclical effect. However, changes in the U.S. economy are the dominant factor, leading the U.S. dollar index to change step by step; and the U.S. dollar index largely reflects changes in the U.S. economy. Although the global share of the U.S. economy and the U.S. dollar index fluctuate from time to time, for example, after the disintegration of the Bretton Woods monetary system, the former reached a maximum of 33.92% and a minimum of 21.16%, while the latter reached a maximum of 164.72 and a minimum of 71.31. However, one trend is relatively clear, that is, as the global importance of the U.S. economy continues to decline, the U.S. dollar index has also trended downward. The U.S. dollar's safe-haven function may support the U.S. dollar index's periodic upward trend when the world faces uncertainty, but it cannot change its overall operating trend.The main reason for the decline in the global importance of the U.S. economy is that, on the one hand, globalization has brought opportunities for the rapid economic development of emerging market countries, with emerging market economies represented by China and India developing rapidly; on the other hand, the economies of developed countries themselves are weak. , the United States is a typical representative, which has resulted in changes in the global economic landscape. The COVID-19 epidemic has had a huge and profound impact on the U.S. economy and society. In the future, the U.S. economy is likely to enter a period of sustained low speed and deep adjustment. The global importance of the U.S. economy is declining, and the halo of the U.S. dollar will further fade. This is an important macroeconomic background for judging the weakness of the U.S. dollar index in the coming period.
2. Six major factors promote the continued depreciation of the US dollar
From the impact of the epidemic on the US economy, the implementation of quantitative easing and zero interest rate monetary policy, the US fiscal debt, the sharp increase in trade deficit, the decline in the international currency status of the US dollar and the deviation of the US dollar currency valuation from the actual level Judging from other factors, although there may be reasons to support the short-term strength of the U.S. dollar due to rising global risk aversion and other factors in the short term, the possibility of a substantial depreciation of the U.S. dollar is increasing.
The U.S. economy has experienced significant negative growth under the impact of the epidemic. Although the United States announced a 33.1% year-on-year growth rate in the third quarter, in fact, the United States fell by 2.8% year-on-year in the third quarter, and the cumulative year-on-year decline from the first to the third quarter was 3.8%. It can be said to be a deep recession. In particular, the epidemic has ignited the inherent contradictions in the operation of the U.S. economy, thus weakening the foundation of the U.S. economy. In recent years, the income gap in American society has widened. In 2018, the Gini coefficient in the United States was 0.485, climbing to a 50-year high. The richest 10% of households accounted for nearly 75% of all household net assets in the United States. From 1989 to 2018, the net growth in the wealth of the bottom 50% of households was basically zero. The biggest contradiction in the current U.S. economy is the contradiction between the elite using various means to maximize their interests and the civilian class facing increasingly narrow paths for advancement. This main contradiction is the root cause of other derivative contradictions such as nationalism, populism and trade protectionism. Before the outbreak of the epidemic, the contradiction between the widening gap in income distribution was already very prominent; after the impact of the epidemic, stimulated by the quantitative easing policy and the CARES relief bill, both the wealthy and low-income classes with large financial assets have benefited, and about The middle class, which accounts for 51% of the total population, has not received substantial assistance. This has caused the contradiction between the widening income distribution gap to not be alleviated, but has become structurally more serious. Europe's attitude towards the epidemic is much more positive than that of the United States. Although the epidemic in Europe and the United States has entered a second outbreak stage in October, it is not difficult to judge that the European economic recovery after the epidemic will be better than that of the United States due to their completely different attitudes towards the epidemic. Since the euro accounts for more than 50% of the U.S. dollar index, a stronger economic situation in Europe than in the United States may bring about a relative strength of the euro and put pressure on the U.S. dollar.
Quantitative easing and low interest rate monetary policies are eating up the intrinsic value of the dollar. After the impact of the epidemic in March, the Federal Reserve responded quickly and launched larger-scale quantitative easing. Data show that since the quantitative easing policy without an upper limit was announced to respond to the impact of the COVID-19 epidemic, the Federal Reserve's balance sheet has expanded by more than US$2 trillion in two months, and the overall size is approaching the US$7 trillion mark. At the same time, the Federal Reserve also quickly lowered the federal funds rate from about 1.6% to near zero, and hinted in September that zero interest rates may be maintained for two to three years. In view of the above, the U.S. economy may be weak for a long time, and the Federal Reserve's monetary policy may remain very loose for a long time. This will inevitably lead to a long-term weakening of the value of the U.S. dollar. In the face of the impact of the epidemic, although the European Central Bank has also carried out a new round of quantitative easing, because the European Central Bank has implemented a zero interest rate policy as early as 2016 and has maintained it until now, the interest rate level has been unable to fall. The Federal Reserve's relatively looser monetary policy than that of the European Central Bank will increase the pressure on the dollar's depreciation.
The federal government's fiscal deficit has increased significantly and the size of the U.S. national debt has soared, making investors increasingly question the U.S.'s ability to repay its debt, which has further shaken confidence in the U.S. dollar. At the end of 2019, the cumulative fiscal deficit of the U.S. federal government reached 14.6 trillion U.S. dollars, accounting for 68.22% of U.S. GDP in the same year.As of September 2020, the U.S. federal government's fiscal deficit for the year has accumulated to 2.7 trillion U.S. dollars. The U.S. Congressional Budget Office estimates that the U.S. federal government's budget deficit will soar to 3.1 trillion U.S. dollars in 2020, accounting for approximately 15.2% of GDP. , a new high since 1945. At the end of 2019, the outstanding balance of U.S. national debt was US$22.7 trillion, accounting for approximately 106.02% of GDP during the same period. As of September, the outstanding balance expanded to US$26.9 trillion, the largest in the past five years, and may account for 130% of GDP in 2021. Based on an estimate of an average 10-year national debt of US$30 trillion, after deducting expenditures such as military medical care, the US government's future fiscal revenue will not be able to repay interest, and in serious cases it will be difficult to return the principal. Observing the indicator of U.S. debt held by foreign investors, we can find that since 2020, the growth rate of U.S. debt held by foreign investors has been declining, even negative in some months, and the proportion has dropped significantly. 30.1% dropped to 26.3%. This figure may reflect global investors' declining preference for U.S. dollar assets. Since the U.S. dollar was decoupled from gold in 1971, the U.S. federal finance has become an important factor in supporting the credit of the U.S. dollar. The deteriorating federal fiscal situation will continue to weaken the credit foundation of the U.S. dollar.
The rapid expansion of the trade deficit has led to increased pressure on the dollar to depreciate. Since the late 1970s, the United States has maintained a year-round deficit under the current account and a surplus under the capital account, allowing the U.S. dollar to complete an international cycle of deficit output under the current account and surplus inflow under the capital account. The key to global trade’s acceptance of this cycle lies in its belief in the “hegemony” of the U.S. economy. However, in recent years, the trend of declining global importance of the U.S. economy has become a consensus, causing the "aura of hegemony" to slowly fade. Global trade has plummeted under the COVID-19 epidemic, but the U.S. current account deficit has increased significantly. In the second quarter, the U.S. current account deficit reached $170.54 billion, a year-on-year deficit expansion of 33.56%. This situation will continue in the third and fourth quarters. Faced with such a large-scale deficit, and taking into account the aforementioned decline in the proportion of U.S. debt held by foreign investors, it is not difficult to imagine that the international cycle of U.S. dollar deficit exports under the current account and surplus inflows under the capital account will become increasingly unsmooth in the future. At present, global trade demand and investment demand for the United States are declining rapidly, which will weaken the global demand for the dollar.
The decline of the United States' status in the international monetary system will inhibit the growth of global demand for U.S. dollars. After the end of World War II and before the disintegration of the Bretton Woods monetary system, the U.S. dollar was the core international currency "above ten thousand people and inferior to one person". However, with the disintegration of the Bretton Woods monetary system, the U.S. dollar experienced the first stage of sinking in its international currency status, and the U.S. dollar index also formed a long-term decline as the world questioned the credibility of the U.S. dollar. At the beginning of the 21st century, the Internet bubble broke out in the United States, the economy declined rapidly, and the international currency status of the U.S. dollar declined again. After that, the birth of the euro, the global financial crisis, and the start of the internationalization of the RMB continued to reshape the pattern of the international monetary system. Looking at the international status of the US dollar from the share of the US dollar in global foreign exchange reserves, we can see its weakening status. In June 2001, the U.S. dollar's share of global foreign exchange reserves was 72.7%, reaching a historical high; it subsequently fell to 60.47% in June 2011, while the corresponding share of the euro increased from 16.97% to 26.74%. Since 2016, due to the Trump administration’s unpopular domestic and foreign policies, the U.S. dollar’s international currency status has begun a new round of decline. The U.S. dollar's share of global foreign exchange reserves has dropped from 65.74% in early 2016 to 61.26% in the second quarter of 2020. From a long-term trend perspective, the decline in the international status of the U.S. dollar will inevitably affect the enthusiasm of central banks, financial institutions, investors and traders to hold U.S. dollars, putting pressure on the U.S. dollar exchange rate.
The overvaluation of the US dollar currency may return under the impact of the epidemic. Recently, there is a view that although the real effective exchange rate (REER) of the US dollar has fallen by 4.3% from May to August, it has only reversed part of the nearly 7% decline from February to April. The dollar remains the most overvalued major currency in the world, with its real effective exchange rate still 34% above its July 2011 low.There are two main factors supporting the overvaluation of the U.S. dollar: the U.S. dollar is the most important international currency; and the hedging function of U.S. dollar assets when the world faces greater uncertainty, the latter is based on the former. The real effective exchange rate of the U.S. dollar is the most important index for measuring trade, competitiveness, inflation and monetary policy, and its trends are closely related to the U.S. economy. Comparing the real effective exchange rate with the U.S.'s global share of GDP, we can find that before 2011, the real effective exchange rate was basically consistent with the U.S.'s global share of GDP. Their highest peaks occurred in 2001, and they were also synchronized during the 2007-2008 subprime mortgage crisis. , fell by a similar margin. However, after 2011, the trends of the two diverged greatly. The real effective exchange rate rose rapidly, rising rapidly from 93.76 to 118.72 in early 2017, an increase of nearly 26.6%. During the same period, the global GDP share of the United States only increased by about 3%. Afterwards, the two trends further diverged, with the real effective exchange rate rising further, while the U.S.'s global GDP share fell slightly. Obviously, this round of rise in the real effective exchange rate deviates from economic fundamentals, and there is a considerable degree of overestimation. The main reason for this overestimation is likely to be the confused reaction of the global economy in the face of greater uncertainty. As uncertainties such as the epidemic and the U.S. election gradually fade away, the original demand for U.S. dollar assets to avoid risks may reverse, and the overvaluation of the U.S. dollar may return accordingly.
comprehensively judged that the trend depreciation of the US dollar in the future period may be a high probability event. According to our calculations, the current true intrinsic value of the U.S. dollar is closer to the level in the second quarter of 2014. The U.S. dollar index may continue to decline from the current level of around 93 to around 80, a decrease of about 14%, which is basically in line with the global importance of the U.S. economy. adapt.
3. Factors restricting the continued sharp depreciation of the U.S. dollar still exist
Although the long-term trend depreciation of the U.S. dollar may be significant, it should be noted that there are still a series of factors that support the periodic strengthening of the U.S. dollar. These factors may cause the U.S. dollar index to decline in the short to medium term. The trend shows a two-way fluctuation pattern. The supporting factors may be phased and local, while the factors promoting the depreciation of the US dollar are trending and overall.
After the US election, US economic policy will shift its focus to promoting the economy to return to normal, which may support the trend of the US dollar. Currently, the United States is experiencing a public health crisis caused by the epidemic, a crisis of racial conflicts caused by emotional confrontation, and a political crisis caused by fierce fighting between parties. These three crises have made the United States the biggest uncertainty in the world economy at this stage. However, this greatest uncertainty may change after the US election. Whether Trump is re-elected or Biden is elected, the top priority of the U.S. ruling party will shift from political elections to stabilizing society and developing the economy. It will inevitably introduce a series of powerful macro-control policies to save the U.S. economy, which may form a The periodic macroeconomic and policy environment is favorable to the US dollar index.
With the uncertainty and instability of the world economy, global demand for safe havens will still maintain a phased expansion trend. It is certain that the world economy will fall into a deep recession in 2020. Developed economies have been severely affected by the epidemic, and emerging market countries represented by India and Brazil may be hit by a new round of crisis due to the epidemic. Conflicts have broken out between France and other EU countries and the Islamic world, exacerbating regional tensions. Global capital tends to regard U.S. dollar assets as safe assets and assets of emerging market countries as risky assets. When uncertainty rises sharply, capital will inevitably withdraw from risky assets and enter safe assets, which will create a greater demand for the U.S. dollar. Staged hedging needs.
The EU economy may once again be in trouble under the second impact of the epidemic, thus pushing up the US dollar index accordingly. Entering October, the epidemic broke out again in Europe and the United States. Relatively speaking, the European Union relaxed its control due to its effective prevention and control of the epidemic in the early stage, resulting in the second outbreak of the epidemic with greater intensity and wider scope, and various data continued to hit new peaks. This caused the EU economy, which had just taken a breather, to be severely impacted again. In the United States, because the epidemic has never been well controlled, the impact of the second outbreak is relatively lower than in Europe.Although the economic growth of both countries is encountering difficulties, the EU economy may be more affected at this stage, which may lead to a phased situation in which the depreciation of the euro drives the appreciation of the US dollar.
The U.S. current account deficit may improve in the short term. In early 2020, China and the United States signed the first phase of the economic and trade agreement. China promised to expand its procurement and import of manufactured goods, agricultural products, energy products and services from the United States by no less than US$200 billion in 2020-2021, above the 2017 base. Among them, the import expansion target in 2020 is US$76.7 billion. Judging from the current completion status, China has completed 71% of this year's target for agricultural products. There is still a big gap in manufactured products, energy and services. In the next few months, China may increase its imports from the United States, and the extent may be within a single unit. With a monthly volume of around 10 billion U.S. dollars, this may improve U.S. exports to a certain extent. At the same time, many economies around the world were originally net exporters, but the epidemic has restricted their export capabilities and increased import demand. They are likely to increase their purchases of U.S. goods in the short term. Taken together, these two factors should support the U.S. dollar index.
4. Pay attention to the impact of the trend depreciation of the US dollar on the Chinese economy
The trend depreciation of the US dollar in the future may have an important impact on the RMB exchange rate, import and export trade, cross-border capital flows and RMB internationalization. In the future, the RMB exchange rate will fluctuate in both directions at a reasonable and balanced level and the overall upward trend will make the external circulation of China's economy take on new characteristics, requiring relevant international economic policies to make forward-looking and targeted strategic arrangements.
The trend of the US dollar index weakening has a reverse appreciation effect on the RMB exchange rate. Observing the trends of the U.S. dollar against the RMB exchange rate and the U.S. dollar index in recent years, we can find that the two are highly correlated. During several periods of relatively large fluctuations, the peaks and troughs of the two almost overlapped with each other (a larger number of the U.S. dollar against the RMB exchange rate indicates depreciation). From theoretical and logical inferences, the U.S. dollar index is the cause and the U.S. dollar-RMB exchange rate is the effect. The trend depreciation of the U.S. dollar will inevitably create trend appreciation pressure on the RMB. China's rapid economic growth, double surplus in the balance of payments, and the existence of a large interest rate gap between China and the United States under the prudent monetary policy will all drive the RMB to strengthen. From the perspective of China's development interests, it is necessary to deepen the reform of the exchange rate formation mechanism in the future, increase the flexibility and volatility of the exchange rate, avoid a larger trend appreciation of the RMB, and strive to keep the RMB exchange rate basically stable at a reasonable and balanced level.
The depreciation of the US dollar not only directly promotes the appreciation of the RMB, but also indirectly affects the exchange rates of the world's major currencies against the RMB, thus affecting China's export trade. Under the impact of the epidemic, China's trade scale has increased instead of falling, partly due to the certain depreciation of the RMB in 2019. It is necessary to review past experiences. From mid-2005 to mid-2008, the RMB appreciated by approximately 18% against the US dollar, and export growth dropped from a high of 33.2% in August 2005 to a lowest level of 6.34% in February 2008. ; From mid-2010 to mid-2014, the RMB appreciated by about 10% against the US dollar, and exports dropped from a growth rate of nearly 40% in mid-2010 to a minimum of -0.55% in January 2012. The current export performance is better than expected, partly due to the substitution effect transferred from the sharp decline in the export capacity of other emerging market countries. When the epidemic situation stabilizes, this effect may no longer exist. The weakening substitution effect combined with the appreciation of the RMB may have an adverse impact on exports in 2021. In the future, exports need to increase efforts to improve the structure, steadily advance towards the mid-to-high-end industrial chain, and strive to become a true export power.
The trend depreciation of the US dollar may induce large-scale trend inflows of cross-border capital into China. As mentioned above, U.S. dollar assets are currently considered safe assets by some investors around the world, but the scope of safe assets may be expanding to include RMB assets that are both safe and profitable, which may trigger capital outflows from U.S. dollar assets. Switch to RMB assets. Currently, the interest rate difference between China and the United States is approximately 230 BP, which will certainly increase the attractiveness of RMB assets to capital. Increased capital inflows will bring a series of derivative reactions to China's capital market and monetary policy. In the future, monetary policy and macro-prudential policy need to balance internal and external issues, effectively manage capital flows, and mitigate the pressure caused by the sharp appreciation of the RMB.
The trend depreciation of the US dollar may provide a rare development window for the internationalization of the RMB. Currencies with higher interest rates and rising currency values are usually favored by investors. In the future, the RMB may expand its international use as an asset currency in the long term. Behind the trend depreciation of the US dollar is the adjustment of the international monetary system. China has entered into a rapid recovery of growth after the epidemic, China's import and export trade has performed strongly during the epidemic, and capital inflows may continue to expand in the future, all of which have created a good environment for the RMB to enhance its international status. We need to seize this historic opportunity in the future.
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