2024-06-24 12:11:56
(The writer of this text is Xu Qiyuan, deputy director of the Institute of World Economics and Politics, Chinese language Academy of Social Sciences)
1. The Fed’s rate of interest cuts might not essentially result in a weakening of the U.S. greenback
Assuming that the Federal Reserve cuts rates of interest in September this yr, what is going to the efficiency of the US greenback appear to be within the subsequent three months?Judging from the historic expertise of seven rate of interest lower cycles previously few many years, in actual fact, among the many previous seven rounds of rate of interest cuts, solely two rounds of rate of interest cuts led to a weakening of the U.S. greenback three months later; following three rounds of rate of interest cuts, the U.S. greenback appreciated three months later. , and even the appreciation development is clear; the outcomes of two rounds of rate of interest cuts are much less apparent.ofAppreciation or depreciation is mainly a flat development.
Even when the interval of motion is prolonged to 6 months later, it may be discovered that the outcomes are nonetheless usually the identical. Among the many seven rounds of rate of interest cuts, two rounds resulted in depreciation, two rounds had been flat, and three rounds resulted in appreciation. so,The connection between the Fed’s rate of interest cuts and the development of the US greenback is definitely unsure, and will even be impartial or biased.StrollRobust relationship.
2. Inside and exterior ambiance helps the USD appreciation channel
First, financial revaluation.The variations within the financial fundamentals of the US, Europe, and Japan are regularly rising. The financial fundamentals of the US stay comparatively robust, whereas the financial fundamentals of Europe and Japan are comparatively weak.
By way of the U.S. home financial system, ranging from the demand aspect, the U.S. GDP within the first quarter dropped sharply from the earlier quarter’s annualized charge following seasonally adjustment, from 3.4% within the fourth quarter of final yr to 1.6% within the first quarter of this yr (preliminary worth). The market thus weakened the U.S. financial system. anticipated. From the angle of distinguishing home and overseas demand, the fundamental home demand in the US is often represented by the sum of family consumption and company funding; whereas authorities funding tends to be on the coverage degree and is comparatively exogenous; web exports signify the exterior demand half, which can be comparatively exogenous, and each quarter The fluctuations are comparatively massive. Subsequently, excluding authorities funding and import and export knowledge and searching solely at consumption and funding, you can find that the home demand progress charge in the US within the first quarter was 2.3%, which was mainly the identical as within the fourth quarter of final yr. Subsequently, the financial resilience of the US continues to be excellent. From the provision aspect, the U.S. financial resilience continues to be comparatively robust.Wanting on the world’s main developed international locations, following the epidemic, solely the US’ labor productiveness has returned to or exceeded the pre-epidemic development line, whereas neither Europe nor Japan has.
Judging from the exterior atmosphere of the US, it is usually conducive to the greenback remaining robust. Taking Japan for example, the yen has depreciated sharply in recent times, half of which is because of the rate of interest differential brought on by the Federal Reserve’s rate of interest hikes, and the opposite half of which is because of the revaluation of Japan’s financial fundamentals. The Japanese yen trade charge is intently associated to its fundamentals reminiscent of digital financial system, inexperienced financial system, synthetic intelligence, and monetary market improvement. Taking the digital financial system for example, Japan’s service commerce surplus is displaying a downward development. One of many causes is that Japan’s digital financial system has to pay some huge cash to the US and in addition pay a part of China. For instance, watching Netflix on-line dramas requires cost and utilization. To pay for ChatGPT and to make use of cloud computing and cloud providers, it’s good to pay the US and a small quantity to China. so,Japan’s present account has additionally been revalued, which is said to Japan’s failure to meet up with new applied sciences such because the digital financial system and synthetic intelligence.. As well as, earlier than the epidemic, Japanese residents tended to put money into home property for monetary administration, however through the epidemic, residents turned to on-line monetary administration by means of apps. Just like how we use Alipay, many younger Japanese folks diversified their funds into abroad property. so,Japan’s asset costs look like very robust, however are literally not that robust following excluding trade charge depreciation.. Even following the Federal Reserve cuts rates of interest and the rate of interest hole between the US and Japan narrows, it is going to be troublesome for the yen to return to its authentic place.This additionally implies that it’s troublesome for the U.S. greenback index to fall once more to its place earlier than the rate of interest hike.
General,Europe is beneath the shadow of the Russia-Ukraine battle, Japan is in a long-term ageing society and lacks the motivation to innovate, whereas the event of AI in the US will enter a brand new technological revolution cycle, and the financial fundamentals of the world’s main economies might be revalued.In flip, the revaluation of financial fundamentals brings a couple of corresponding revaluation of the US greenback index.
Second, geopolitical revaluation can be a revaluation observe that may make it troublesome for the US greenback to weaken even when the Federal Reserve cuts rates of interest.An essential turning level in geopolitical reassessment was the Russia-Ukraine battle in February 2022. From then on,successivelyThe continued geopolitics and native conflicts have strengthened the U.S. greenback’s attributes as a protected asset and a safe-haven foreign money.
Why the 1998 rate of interest lower didn’t trigger the greenback to depreciate and even admireAcquired it? It is because through the Clinton administration within the Nineteen Nineties, the US had new financial developments led to by the rise of Web know-how, which prompted the Federal Reserve to chop rates of interest with out triggering a depreciation of the US greenback. On this cycle of rate of interest cuts, the US not solely has an financial revaluation, but in addition a geopolitical revaluation, and a considerable amount of world funds have returned to the US. Subsequently, the mix of financial revaluation and geopolitical revaluation might make the greenback robust cycle longer than we predict.
Third, there’s nonetheless an enormous uncertainty in the US concerning the U.S. presidential election within the second half of this yr.There’s suspense between Trump and Biden. In response to present polls, Trump has a bonus. If Trump is elected, in response to Trump’s type, he’ll set off a whole lot of fireplace following he takes workplace.One expectation is that following Trump is elected in 2025, the U.S. financial system might usher in a brief interval of prosperity, together with 2025 and 2026. However this growth might make U.S. inflation stickier and delay its downturn.Subsequently, if Trump is elected, the market is anticipated to react instantly, and the extension of expectations for U.S. inflation might be additional mirrored in asset value pricing, which can additional delay the method of rate of interest cuts by the Federal Reserve, thereby affecting the development of the U.S. greenback. Subsequently, the U.S. election may even have an effect on the U.S. greenback.
General, the revaluation of the U.S. financial system, the relative revaluation of the nation’s financial fundamentals within the U.S. greenback index, and the revaluation of geopolitical tensions, plus the impression of Trump’s election mirrored in asset costs, might have an effect on the U.S. greenback. Supporting impact.
3. How the anticipated strengthening of the US greenback will have an effect on world financial restoration
First, the impression on the US itself. The investor construction of the U.S. Treasury market has modified. Previously, U.S. authorities bond traders had been dominated by institutional traders reminiscent of business banks. Earlier than 2023, institutional traders will account for regarding 50%-60%. The benefit of a excessive proportion of institutional traders is that their holdings of U.S. debt are comparatively secure, and are comparatively much less affected by fluctuations in U.S. bond costs and yields, and the U.S. Treasury market may even be comparatively secure.Because the starting of 2023, the proportion of traders within the U.S. Treasury bond market who’re delicate to cost fluctuations of Treasury bonds has elevated considerably, by greater than ten proportion factors, whereas the proportion of traders who’re insensitive to cost fluctuations of Treasury bonds has dropped by greater than ten proportion factors. Thus, Including to the volatility within the U.S. Treasury market.
There are additionally potential dangers within the U.S. company bond market.Amongst U.S. company bonds, the proportion of AAA-rated corporations has declined, whereas the proportion of junk-bond corporations has elevated. For the bond market, it’s troublesome to instantly decide whether or not it’s good or dangerous. The nice factor is that it may possibly value junk bonds by means of the worth discovery perform and enhance the liquidity of the monetary market. The dangerous factor is that from the angle of economic market stability, , previously ten years or so, particularly in recent times, the proportion of AAA-rated bonds has considerably decreased, whereas the proportion of junk bonds has elevated considerably. On the similar time, when the Federal Reserve slashed rates of interest to rescue the market in 2020, corporations and residents borrowed a lot of low-interest loans. After the borrowing cycle, rates of interest haven’t but dropped once more to their authentic low ranges, and rates of interest proceed to roll. Firms and residents might need to borrow new cash to repay outdated ones, creating big financial strain. Subsequently, there are potential issues within the U.S. Treasury and company bond markets, that are additionally mirrored to a sure extent within the chapter of Silicon Valley Financial institution in early 2023 (though Silicon Valley Financial institution additionally has its personal working and administration errors).
Secondly,Influence on creating nation debt. A stronger US greenback is anticipated to have a higher impression on the debt of creating international locations, however will it result in world systemic dangers? Most likely not, it is extra of a neighborhood downside.For instance, some closely indebted poor international locations, together with Argentina, Brazil and different Latin American international locations, are extra depending on capital inflows and are extra delicate to rate of interest hikes by the Federal Reserve or the US greenback trade charge. Closely indebted poor international locations might consider that though their money owed are excessive, the Fed’s rate of interest hikes or the appreciation of the U.S. greenback will improve debt reimbursement pressures, identical to the “Period of Chaos” in “The Three-Physique Downside”. These international locations should bear it and wait, perhaps by 2024 Years might be high quality. However because of this, these international locations discovered that the Federal Reserve didn’t enter the rate of interest lower channel as anticipated in 2024. They can wait and wait till the top of 2024 or early 2025. What I wish to say is,This “period of chaos” might last more than we think regarding, and the closely indebted poor international locations amongst creating international locations might have underestimated the challenges they are going to face within the subsequent one to 2 years. That is additionally an element that China, as a creditor, additionally wants to think regarding.Subsequently, for the indebted poor international locations amongst creating international locations, we have to be clearly conscious of the urgency and necessity of this downside, and actively search debt restructuring options to unravel the issue, moderately than ready for the Federal Reserve cycle to cross and remedy it naturally. this downside.
As well as, the impression on China. Though I consider that the excessive US greenback and the excessive rate of interest differential between China and the US shouldn’t turn out to be a constraint on China’s financial coverage.Nonetheless, it have to be admitted that my nation’s financial coverage will inevitably be topic to sure restrictions.The excessive rate of interest differential between China and the US might expose our financial coverage, particularly rate of interest financial coverage, to extra exterior influences. Subsequently, if financial coverage is affected, home fiscal coverage should play a extra energetic function.At current, the crowding-out impact of my nation’s fiscal coverage is comparatively small.
However I personally want to consider that our nation’s financial coverage shouldn’t be affected a lot by the U.S. Federal Reserve’s financial coverage.Along with rate of interest parity, what helps trade charge stability is buying energy parity, and extra importantly, confidence parity.If our financial and monetary insurance policies are free, together with different non-economic insurance policies and reform insurance policies, we will really encourage the boldness of the non-public sector and worldwide traders and make everybody really feel that this coverage is efficient. Then market confidence is boosted, which is extra essential and decisive than the differential and different influencing elements. If we get our confidence once more, the trade charge might be strongly supported. Subsequently, we should always launch the area of financial coverage and monetary coverage, and make full use of the area of varied insurance policies.
(The total textual content is compiled from the writer’s speech on the CMF Macroeconomic Sizzling Subjects Seminar (Problem 87). This text solely represents the writer’s private views)
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