wonder! I am not optimistic about the United States. Why is the dollar so strong?

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Author: Rong ping source: official account: Rong Ping (ID: rongping898) has been authorized to reprint

Since the beginning of this year, the US dollar index has been rising and has recently reached a new high since 2002. So far this year, the US dollar index has risen nearly 14%.

It is said that the trend of a country’s currency exchange rate has a strong connection with the country’s economic fundamentals and even national destiny. Nowadays, people generally look down on the United States, with high inflation, political infighting, social tearing… The signs of recession are all obvious. Some people even compare it to China in the late Qing Dynasty. But why does the dollar continue to strengthen?

If you choose a less rotten apple from a pile of rotten apples, the price of this less rotten apple must be higher than that of other rotten apples. This is also a simple theory of relativity.

The U.S. economy is indeed very bad, the inflation rate is close to 10%, and the signs of economic recession are very obvious. However, compared with other Western economies, the situation of the United States is better than expected. This is the main reason why the strong rise of the US dollar index and the “defeat” of non US dollar major currencies such as euro, Japanese yen, British pound and Korean won.

Whether it was the war between Russia and Ukraine, the United States acted as a safe haven for funds, leading to the outflow of funds from the euro area; The reason behind the continuous quantitative easing of the Bank of Japan, which led to the continuous depreciation of the yen and the loss of its status as a safe haven currency, is related to the aggressive interest rate increase of the Federal Reserve in coordination with the global situation, with the purpose of attracting global dollar liquidity back to the United States to support its economic recovery.

First, the US dollar is too strong because other rival currencies are too weak, mainly the euro and the Japanese yen.

Euro, sterling, Japanese yen, Australian dollar and other G10 currencies are depreciating against the US dollar, which also makes the US dollar index unique. While the US dollar index hit a 20-year high, the euro fell below the 0.99 level against the US dollar, continuing to hit a 20-year low; The won fell to a 13 year low against the US dollar; The yen fell to 140 against the US dollar, a 24-year low.

In particular, the euro has a weight of nearly 60% in the US dollar index, while the European Union is experiencing high inflation caused by the war between Russia and Ukraine and Russia’s reduction of energy supply, and the economic recession trend is much more serious than that of the United States.

On August 22, local time, the Dutch TTF natural gas futures, the European natural gas benchmark, once soared by more than 20%, reaching a maximum of 295 euros / MWh, about 15 times that of the same period in previous years. The German electricity price exceeded 700 euros per MWh for the first time in the history. At the same time, the euro zone also suffered from the “three kill” of stocks, bonds and foreign exchange: European stock markets generally fell sharply, and Germany’s DAX index fell more than 2%; Many bond markets fell one after another, and bond yields rose; The euro hit a 20-year low against the US dollar and fell below parity again.

The euro fell below parity against the US dollar, and the reverse support for the US dollar index is undoubtedly huge.

The respective proportions of other currencies in the US dollar index are: Euro 57.6%, Japanese yen 13.6%, British pound 11.9%, Canadian dollar 9.1%, Swedish Krona 4.2%, and Swiss Franc 3.6%. Obviously, the euro and the Japanese yen together account for more than 70% of the weight of the US dollar index. As long as the exchange rates of the euro and the Japanese yen are manipulated, the strength of the US dollar exchange rate can be easily realized. In addition, the trend of sterling is relatively weak, and the currency that accounts for 81.2% of the dollar’s relative pricing anchor is weak, which directly leads the dollar to walk out of the strong dollar trajectory under high inflation.

Second, the monetary policy deviated, the Federal Reserve raised interest rates aggressively, and the pace of tightening in major economies such as Europe, Japan and the United Kingdom was slow.

At present, the European economy is facing multiple crises, which are more serious than the US economic expectation. The decline of the euro exchange rate is an inevitable result. At the same time, the loose monetary policy of the Bank of Japan and the deviation from the monetary policy of the Federal Reserve jointly determine the upward trend of the dollar.

In the face of high inflation, the Federal Reserve has adopted a radical monetary tightening policy, raising interest rates by 75 basis points for many times. Both the European Union and the Bank of Japan are very cautious in monetary tightening, basically not following the tightening action of the Federal Reserve, but further expanding quantitative easing. This makes the dollar become scarce in the global market, which promotes the strength of the dollar.

The interest rate increase by the Federal Reserve has enhanced the attractiveness of the US dollar. Compared with the low interest rates of the European Union and Japan, the US dollar has obvious advantages in terms of income. Therefore, it has attracted global funds, especially those from the euro zone, to return to the United States. The decline in the risk aversion effect of the Japanese yen has also relatively improved the risk aversion attribute of the US dollar.

Third, in the long run, although the US economy is in recession, it is still much better than the EU.

You may say that the economic growth of the United States in the second quarter was weaker than that of the euro zone. How can we say that the economic recession in Europe is more serious?

Indeed, unlike the negative GDP growth of 0.9% in the United States in the second quarter, the economies of the euro area and the European Union both grew by 4% in the second quarter, of which the euro area grew by 0.7% month on month, and the whole European Union grew by 0.6% month on month. Although Germany’s economy grew by zero, France grew by 0.5%, Italy grew by 1%, and Spain grew by 1.1%. These are obviously better than the United States. Why is there such an abnormal phenomenon?

The most critical factor is the continuous depreciation of the euro. Due to the continuous depreciation of the euro, exports have increased significantly, and tourism has also recovered significantly. For example, Spain mainly benefited from tourism.

The US dollar continued to rise, and it rose to parity with the euro. This process is also the process of the continuous depreciation of the euro. Americans flocked to Europe for vacation, which led to the rapid recovery of European tourism and stimulated the economic growth of the European Union. On the contrary, due to the decline of European purchasing power, Europeans continued to reduce their imports from the United States and eventually transmitted them to the American economy. Therefore, the United States and Europe experienced negative growth and positive growth, with a significant difference.

The European economy benefited from the devaluation of the euro, and there was a certain short-term stimulus effect on economic growth. However, after the depreciation of the euro, the differences between the European and American economies have been reflected!

In August, US business activity shrank for the second consecutive month, and the comprehensive PMI fell to the lowest level since May 2020. Economic activity is also declining. The GDP of the euro area is shrinking. The record energy prices and food increases have led to a drop in demand. More industries are facing a bleak prospect – the manufacturing industry is leading the decline. The rebound of tourism and other service industries has almost stagnated after the lifting of the epidemic prevention blockade. The PMI of the UK managed to stay above the 50 year old watershed, but manufacturing activity unexpectedly fell sharply.

In short, the obvious differences between the US economy and monetary policies and those of other economies, as well as the high proportion of euro, Japanese yen and sterling in the US dollar index, have led to the continued strength of the US dollar index.

Some people say that it is because the currencies of other countries are too weak, setting off the strength of the US dollar; Some people say that the aggressive interest rate increase by the Federal Reserve has triggered global dollar liquidity tension and led to the rise of the dollar price. But in fact, the secret of this problem lies in the hegemony of the US dollar. The main reason is that the world’s financial operation mechanism is a settlement and circulation mechanism centered on the US dollar. The world currency status of the US dollar has not changed, and the internal mechanism of the United States harvesting global wealth through the rise and fall of the US dollar has not changed.

As long as the hegemony of the US dollar is not overthrown, other economies will suffer. The United States can steal global goods and wealth by printing money at home, and become a worm lying on the global economy. As long as there is a crisis in the United States, it can quietly transfer the crisis to other economies through the Federal Reserve’s interest rate rise and reduction, so as to transfuse the US economy through the circulation of US dollar liquidity, or resolve the inflation crisis.

On the 26th, US Federal Reserve Chairman Powell said that the US Federal Reserve would not be affected by the data of one or two months. The current inflation situation in the United States is still grim. The US Federal Reserve “must persist in raising interest rates until it is successful”, which completely broke the market’s illusion of the US Federal Reserve turning pigeons. Why does the Fed dare to raise interest rates so aggressively?

In essence, the US dollar hegemony mechanism still exists, and the channel for the United States to transfer crises to global economies is unblocked. The United States can quietly cut leeks from other economies——

The US Federal Reserve cut interest rates, and emerging markets borrowed a large amount of US dollar bonds, resulting in economic prosperity; Once the interest rate is raised, the capital will flee, the foam will burst, and the emerging markets will be filled with grief. If this emerging market country unfortunately owns a depreciated local currency and owes an appreciating foreign currency, the ensuing debt crisis will almost be wiped out

Exploiting the tide effect of the dollar to harvest and transfer global wealth is the internal logic of the dollar hegemony. The strong dollar has created difficulties for other economies, but the fruits of years of hard work have been quietly taken away by the United States. This seems to have become an eternal iron rule in the global economy and financial markets.

Behind this is still the hegemonic position established by the United States in the global monetary system since World War II, that is, the dollar is linked to gold, oil and other basic commodities, while other currencies are linked to the dollar. The United States can legitimately levy seigniorage on other countries. If this mechanism does not collapse, the strength of the US dollar will be firmly controlled by the Federal Reserve. During the crisis period, a strong US dollar is almost a nightmare that other economies can not get rid of.

As long as the United States operates the money printing machine at home, it can reap global wealth. The essential support behind it is the world currency status of the United States dollar. This is a set of “perpetual motivation” for wealth transfer designed by those farsighted politicians and economists in the United States after World War II. Therefore, even though the US economy is now in such a bad state and the internal strife at the political level is constant, the US dollar can still maintain its strength under the support of the interest rate increase.

Review the evolution of the US dollar——

Gold was used in international trade. In 1944, it became the gold dollar, that is, the dollar was linked to gold, and the currencies of various countries were linked to the dollar, realizing “double pegging” or “double pegging”; After the disintegration of the Bretton Woods system in 1971, the United States dollar was bound to oil, and to a certain extent, it became an oil dollar. In essence, it became a credit dollar, supported by the national credit of the United States; In recent decades, the dollar has become a debt dollar. At present, the total debt of the US federal government has exceeded $30 trillion.

From 1944 to 1971, it was the international consensus and convention that gave the dollar legal status, and then it was the dollar hegemony created by the United States itself——

On August 15, 1971, then US President Nixon announced that the US dollar was no longer linked to gold, and the currencies of the world were no longer linked to the US dollar.

This is a major and public default of the United States against countries in the world, which directly led to the disintegration of the Bretton Woods system, and the currencies used for international trade settlement and the reserves of various countries became credit currencies.

Then, in 1973, the fourth Middle East War broke out, and the oil crisis and economic crisis followed.

As the world’s largest oil importer, the United States first reached an agreement with Saudi Arabia, the largest oil producer, to settle oil in US dollars, and then reached an agreement with the organization of petroleum exporting countries. The oil trade settlement currency was bound to US dollars, thus establishing US dollar hegemony.

Former French President Charles de Gaulle hit the nail on the head and pointed out the essence of US dollar hegemony——

The United States enjoys the super privilege and no tears deficit created by the dollar. She uses worthless waste paper to plunder the resources and factories of other nations.

In economic terms, it means that surplus countries take the accumulated US dollars to buy US bonds, the United States takes the funds borrowed from surplus countries to buy its products again, and surplus countries take the earned US dollars to buy US bonds again. In this way, the United States has created more and more deficits and debts, nurturing the greed of American capital.

Up to now, the dollar hegemony is still the underlying mechanism for maintaining the “strength” of the United States. As long as this hegemonic mechanism is not eliminated, the United States will have a channel to transfer crises and steal wealth to the world. If other countries want to get rid of the US dollar hegemony, they may have to work hard on Trade and currency settlement with the United States, such as reducing exports of goods to the United States and promoting local currency settlement, that is, establishing an internal circulation within their own countries without relying on exports to the United States to create economic effects. At the same time, only when all countries in the world unite to launch a joint attack on the dollar hegemony can we avoid the harvest of wealth and preserve the fruits of our own economic development.

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