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The dollar is facing unprecedented challenges

In February 2018, the United States faced three killings of stocks, debt and foreign exchange, and the do

The dollar is facing unprecedented challenges
The dollar is facing unprecedented challenges

llar index fell to a multi-year low of 88.26 on February 16. However, with the Fed raising interest rates four times in a row in 2018, the dollar index has finally emerged from its weakness and has risen all the way, reaching 99.69 in October, making it very strong.

However, foreign media said on Nov. 19 that the fate of a strong dollar has not yet changed decisively, but the conditions for its weakening are already in place. So what exactly are the conditions that really lead to a stronger or weaker dollar? What is the impact on the US economy if the dollar starts to weaken? What does it mean to China? Looking at the length of time, the upward trend in the dollar index actually began in the second half of 2014, when the Fed announced that its third round of QE stopped in October of that year, so the dollar index rose all the way from below 80 to 103.82 in August 2017. The high point, while the Fed began tightening monetary policy in December 2017, began to scale back its balance sheet.

The dollar is facing unprecedented challenges
The dollar is facing unprecedented challenges

On the face of it, the dollar is closely linked to the Fed’s monetary policy. However, on Nov. 19, foreign media pointed out that the Fed’s monetary policy is likely to be the direct cause of the change in the dollar index, and that the deep-seated reason for the real change in the dollar should be the most reliable engine of the U.S. economy: American consumers. In fact, rising consumer demand is important to any country’s economy, but there is no doubt that consumption has a unique position for the American economy. The data show that the contribution of consumption to the US economy has reached 70% to 80%, compared with the US economy since 2014. Although Ji is in a downturn in history, consumption has been a reliable engine of the country’s economy.

In this regard, we can look at American consumption from the retail sales data of the United States. Retail sales in the United States have fluctuated since January 2014, but have generally shown an upward trend, according to the data. Retail sales in the United States were $420 billion in January 2014, but by June that figure had ballooned to nearly $520 billion, with the latest figures in October showing retail sales in the country at $526.54 billion.

In other words, retail sales in the United States have risen by more than 25 percent in the past five years. At the same time, U.S. GDP rose nearly 18 percent from $17.43 trillion in 2014 to $20.5 trillion in 2018. It was the Fed that began to shrink and raise interest rates one after another by seeing the U.S. economy begin to improve and even overheat, causing the dollar index to rise all the way up. However, foreign media believe that although the “fate” of the dollar has not yet undergone a decisive change, but the three conditions for weakening have begun to be in place.

The dollar is facing unprecedented challenges
The dollar is facing unprecedented challenges

This suggests that the world’s first-largest economy is likely to be trailing the global manufacturing growth. J.P. Morgan is of the view that, driven by non-U.S. economies, the global economic situation in 2020 is increasing. Hans Redkke, a strategist at Wall Street’s well-known investment bank, said that as the global non-US economy grew, investors are transferring their funds from the US-expensive U.S. dollar assets to cheaper places, The outflow of capital will also result in a decline in the dollar index. Third, the Fed has also cut interest rates by three-degree, and starts to shrink, which also means that the U.S. economy is likely to The problem of a recession is facing. As mentioned above, the Fed’s monetary policy is likely to be a direct factor that affects the trend of the dollar’s index, so that in terms of these three terms, the weaker dollar is likely to start.As the dollar strengthened, global capital continued to flow into high-yield bonds in the United States, but the deficit in the country’s net investment position increased further, meaning that the deficit in assets held overseas by the United States minus its debt to foreigners was widening. To put it more colloquially, this means an increase in the debt of American residents, and too much debt will undoubtedly weaken their purchasing power and lead to a decline in American consumption. Second, as US manufacturing shrinks, global investors are moving to non-US markets. The global manufacturing PMI, compiled by J.P. Morgan’s global economic team, was reported to have risen for three consecutive months in October, compared with 3.5% in October.  U.S. ISM manufacturing PMI fell below 50 for three months in a row, meaning the country’s manufacturing sector is shrinking.

On the contrary, when the dollar index goes downhill, money will withdraw from the United States, which will further aggravate the decline in the dollar index, and is even likely to lead to another killing of stocks, debt and foreign exchange in the United States. In fact, net international capital outflows from the United States reached $37.6 billion in September, the largest outflow in eight months, according to Treasury data. This may indicate that foreign investors have realized that the strength of the dollar is unsustainable, so they are starting to withdraw from dollar assets, and once the dollar officially weakens, international capital is likely to flee the United States faster.

However, as the dollar falls, American imports from other countries require more money. If the United States can make the same product at home, the move will help reduce the country’s imports, increase domestic production and demand, as well as its economic development. Unfortunately, due to the outflow of manufacturing in the United States, many of the country’s products, especially necessities, need to be supplemented by imports, so this will lead to an increase in imports, which is likely to further aggravate the U.S. trade deficit.

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