[U.S. Dollar Hegemony] Can the U.S. dollar stay strong after the epidemic?

Factors affecting the strength of the dollar

1. U.S. interest rates: Under normal circumstances, when U.S. interest rates fall, the trend of the US dollar will weaken; the rise of US interest rates is beneficial to the trend of the US dollar.

2. Commodity prices: Commodities on the international commodity market are mostly priced in US dollars, so commodity prices have a relatively obvious negative correlation with the US dollar index. When inflation occurs, it is often described as "the market has too many dollars chasing too few goods." In other words, when consumer spending exceeds the output of goods and services, the purchasing power of money will decline.

3. The trend of the euro: the euro is the most weighted currency in the basket of currencies composed of the dollar index. The trend of the euro has naturally become an important factor affecting the dollar index. The stronger the euro, the weaker the dollar, and vice versa.

U.S. dollars under the epidemic

After hitting an all-time high in March, the dollar index has fallen by 10%. And at the beginning of July, the so-called "Death Cross" appeared in the technical field, that is, the 50-day moving average fell below the 200-day moving average, indicating that it may fall further. According to analysts at BofA Global Research, since the 1980s, the U.S. dollar has fallen into weakness eight of the nine death crosses.

The market forecasts about dollar trend after the epidemic

Scholar Roach: The U.S. dollar will fall by 35%

Roach, the former chief economist of Morgan Stanley and a scholar at Yale University, had earlier boldly predicted that the U.S. dollar would depreciate by 35%. The reason was that from 1960 to 2005, the United States' net national savings accounted for an average of 7% of national income. After the outbreak, The drop to 1.4% in the first quarter of this year, coupled with the official launch of a series of bailout policies, led to this year's US deficit-to-GDP ratio rising to a post-World War II high. At the same time, Washington is going the route of globalization and protectionism. The U.S. savings rate is expected to fall to negative in the future. Therefore, it is estimated that the U.S. dollar may fall by 35% at the earliest this year or early next year.

Central banks’ ‘De-dollarization’

Goldman Sachs warned that U.S. policy is triggering worries about currency depreciation and that the dollar may lose its reserve currency status. At the same time, statistics indicate that 15 European and emerging market countries, including Germany, the Netherlands, Australia, Italy, France, Switzerland, and Russia, intend to ship gold stored in the United Kingdom and the United States back to their home countries in advance, which are central banks around the world. An important step in the layout of de-dollarization.

The move by global central banks to ship gold back seems to have publicly cast a vote of no confidence in the U.S. dollar. Countries who ship back gold can regain control and custody of gold reserves, diversify foreign exchange reserves, and hedge against the collapse of the U.S. dollar-led global currency credit system risk

EU fiscal integration

In the week of the end of July, the euro hit a two-year high against the US dollar. The reason is as described by the New York Times: Europe is better than other places in controlling the epidemic. “Euro assets are making a comeback.” Another reason is that in late July, EU leaders agreed to issue 7,500. Billion euros of common bonds, which will promote EU fiscal integration and strengthen the euro. On August 18, the transaction even climbed to 1 euro to 1.1966 US dollars, reaching a new high since May 2018.

De-dollarization of European trade

After the 2008 financial tsunami, Russia gradually increased the proportion of Euro settlement in export trade, and reached settlement agreements in local currency with countries such as Iran, China, and Turkey (using its own currency for settlement). Until the first quarter of this year, the U.S. dollar's share in Russia-China trade fell to 46%, the lowest in history, and fell below half for the first time. Nine European countries, led by the United Kingdom, France, and Germany, have also established the "Trade Support Tool" (INSTEX) mechanism, allowing these countries to trade with Iran without using U.S. dollars for settlement.

Strong dollar: Depreciation only occurs in short term

Krupkin, head of foreign exchange trading at Barclays Group of Ten (G10), said that given the depth of the capital market and the huge global dollar-denominated trading volume, the United States is still far from losing its reserve currency status. However, he also expects that as the current trend of capital outflows from the US dollar continues, and the market may not fully reflect the risks of the US election, the US dollar will depreciate in the short term.

In fact, there have been many warnings about the decline of the U.S. dollar over the years, including after the 2008 financial crisis, but they have not been realized. Part of the reason is that there are not many options other than U.S. dollar assets. For example, U.S. Treasury is the world’s largest bond market. $20 trillion in outstanding bonds.

More than 98% of exchange rate transactions have nothing to do with international trade

In addition, under the international monetary system dominated by the credit currency dollar, the exchange rate of the dollar depends not only on the long-term competitiveness of the country’s credit, politics, and economy, but also on the game of interests between countries, and on the excessive exchange rate speculators. The degree of speculation (as far as the current international exchange rate market is concerned, more than 98% of exchange rate transactions have nothing to do with substantive international trade).

From the 1980s to the present, the U.S. dollar has basically been in a strong position. Some U.S. dollar exchange rates will experience short-term depreciation, but will soon rise again, such as the outbreak of the US financial crisis in 2008. Unless the U.S. government uses political games to artificially force non-dollar currencies to appreciate, such as forcing the yen to appreciate through the Plaza Agreement in 1985.

Rebutting Roach: The dollar only depreciated sharply under extreme circumstances

Hong Kong's senior foreign exchange and commodity independent analyst Lu Churen wrote an article to refute Roach, who believes that the sharp depreciation of the US dollar should be beneficial to the financial market. Just as in March, a panic in the financial market caused the liquidity of the U.S. dollar to squeeze and the U.S. exchange rate soared. Therefore, the sharp appreciation of the U.S. dollar had an impact on the financial market. The depreciation of the U.S. dollar reflected that there was no panic in the market. The US government budget deficit and current account deficit have worsened, but most countries in Europe, Asia and South America are basically facing the same problem. In this trade, it is impossible for Roach's problem to cause a substantial depreciation of the dollar.

If the U.S. dollar depreciates significantly, unless there are very negative political and economic factors in the U.S. or U.S. dollar, the Fed will further adopt an extremely loose monetary policy to save the economy. At the same time, there will be very positive political and economic factors in Europe or the euro, which will cause the European Central Bank to tighten monetary policy. When this extreme situation occurs at the same time, the euro has a chance to soar and cause the dollar to plummet. Judging from the current situation, it is just the opposite. The political and economic situation in the United States, monetary policy, and stock market performance have the upper hand, while Europe has the disadvantage. The EU is not united from beginning to end, and people in some European countries have often heard calls for countries to hold a referendum on Brexit.

Inaccuracy of "Death Cross"

Lu Churen said that in addition to this one in the past year, there was also a "Death Cross" on December 30 last year. However, after that, it is extremely ironic that the US dollar index has not fallen sharply, but has bottomed out at 96.35 and rebounded to 99.91. Another time there was a golden cross on February 21, but it is also ironic that the dollar index peaked at 99.91 and fell sharply to 95. The so-called golden or death crossing of the above 50 antenna and 200 antenna combination is extremely inaccurate.