Since the beginning of this year, under the influence of geopolitical conflicts, slowing global economic growth and the Federal Reserve interest rate hike cycle, the U.S. dollar index has continued to rise and hit a high in nearly 20 years. Since mid-July, concerns about a U.S. economic recession have intensified. The fundamental support for the U.S. dollar has weakened. At the same time, inflation has shown signs of peaking. The marginal contribution of interest rate hikes to the appreciation of the U.S. dollar has slowed, and the U.S. dollar index has fallen. Since mid-August, the U.S. dollar index has strengthened again, breaking through the previous high and rising to close to 109 levels. What kind of reaction is expected? What is the impact on asset prices?
Why did the U.S. dollar index hit a new high?
Fundamentally speaking, the trend of the U.S. dollar index reflects the relative strength of the U.S. economy and other major economies around the world. Among the U.S. dollar index components, the euro accounts for the highest weight (57.6%), followed by the Japanese yen (13.6%) and the British pound (11.9%). Currently, the U.S. economy still has an advantage over Europe, and the U.S. dollar is stronger relative to the euro, which provides certain support for the U.S. dollar index. Specifically, compared with the United States, which has already passed its inflation peak, Europe seems to be heading towards an inflation peak. Inflation caused by rising energy prices remains high. Inflation in nearly half of the EU countries is as high as double digits. The manufacturing industry is weak, the purchasing power of European residents has declined, the demand side is under pressure, and the risk of recession has increased. The European Central Bank has raised interest rates and stopped its bond purchase plan, and there is a potential crisis in the expansion of sovereign debt spreads. At the same time, there is still great uncertainty about the Russia-Ukraine conflict and the future of energy prices. In Japan, weak economic data reflects a weak recovery, the Bank of Japan insists on loose policies and the Federal Reserve continues to deviate from the Fed , and the Japanese yen is weak. In addition, the U.S. dollar index is still affected by risk aversion and expectations of interest rate hikes by the Federal Reserve, and may remain high in the short term. However, the trend of the U.S. dollar index this year has been more priced in fundamental differences, monetary policy divergence and global recession risk aversion, and there is limited room for further gains.
How does the strong US dollar affect A shares?
One of the main concerns about the impact of the strong US dollar on A-shares is capital outflows. Recently, the onshore and offshore RMB fell below the 6.9 yuan mark again after two years, but this will not necessarily lead to continued outflows of funds heading north. Domestic pessimistic expectations are still being interpreted. In the process of gradually bottoming out and recovering, marginal changes in Sino-US fundamental expectations may be beneficial to the subsequent performance of A-share market . As domestic liquidity remains ample, risk appetite may recover. In the medium and long term, compared with major European and American economies that are on the verge of recession, China's economic development prospects are better, the impact of short-term exchange rate fluctuations is limited, and RMB assets are still attractive to foreign investment.
What do you think of in US stocks?
Looking back at the performance of U.S. stocks since the second half of the year, under the pessimistic expectations on the denominator side, the market is trying to find optimistic signals on the profit side of the numerator. During the earnings season in July and August, the S&P 500 rebounded strongly by more than 10%. Judging from the second quarter report of the U.S. stock market, profits are still relatively strong, and sales revenue and profit margins both reflect the resilience of consumer spending under high inflation, which seems inconsistent with macro recession signals. However, as the earnings season comes to an end, the market's trading logic will once again shift from micro (profit) to macro (growth, inflation, employment, etc.). The U.S. stock market has fallen for several days in a row recently, reversing its strong rebound since mid-June. The important reason behind this is the intensification of recession signals in the U.S. economy and even the global economy. As concerns about an economic recession and the Federal Reserve's aggressive interest rate hikes are still brewing, the upcoming employment and CPI data will still bring some volatility to the U.S. stock market.
Looking ahead, slowing inflation, a return to positive economic growth, and the end of the midterm elections may become important factors supporting U.S. stocks. In the short term, economic data and expectations of the Federal Reserve raising interest rates will disrupt the market. However, when U.S. bond interest rates peak and fall, U.S. stocks will bring about a recovery in valuations and sentiment.
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The above information is for reference only. If you need to purchase related fund products, please pay attention to the relevant regulations on investor suitability management, conduct risk assessment in advance, and purchase fund products with matching risk levels based on your own risk tolerance. .
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