How the continued strength of the U.S. dollar affects Americans and the Chinese yuan | USD strength | USD strength | USD exchange rate

[The Epoch Times, April 22, 2024](Comprehensive report by Epoch Times reporter Xia Yu) After the strong U.S. dollar demonstrated its power as the king of the U.S. dollar last week, on Monday (April 22), in early Asian trading, the euro and the yen were relatively stable, and the U.S. dollar It continues to remain near the high level, which is a positive signal for Americans’ purchasing power, and it is more difficult for the RMB to challenge the US dollar’s ​​dominance.

The U.S. dollar’s trade-weighted index was above 106 on Monday but off the five-month high hit last week after comments from Federal Reserve officials and a slew of higher-than-expected inflation data forced rate cut expectations back.

The U.S. dollar index, which measures the strength of the U.S. dollar against six currencies, closed at 106.26 last Tuesday (April 16), the highest level since early November.

The strong U.S. economy is an important reason for the dollar’s rise in the past week

The latest retail spending data released on April 16 showed that Americans continue to open their wallets; other data released earlier this month showed that the U.S. job market remains solid and manufacturing is expanding.

Fed officials have said the economy’s resilience means they can hold interest rates steady at a 23-year high while waiting for more evidence that inflation will move toward their 2% target. If the economy shrinks significantly, central banks will cut interest rates because, in addition to stabilizing prices, central banks are also responsible for maximizing employment.

But there are signs that the cooling of inflation has stalled. March marked the third consecutive month that inflation data came in higher than expected. Recently, higher natural gas prices and continued increases in housing costs have pushed up headline inflation.

Federal Reserve Governor Michelle Bowman said in a speech last Wednesday that the Fed may need to raise interest rates again or further delay an initial rate cut because “financial market activity is high and the economy continues to grow beyond the point where policy is sufficiently tight.” our expectations”.

A strong U.S. economy isn’t the only factor boosting the dollar

Claudio Irigoyen, global head of economics at Bank of America, told CNN that the dollar is strengthening for a number of reasons. It’s not just the Fed saying it won’t cut interest rates anytime soon that’s causing markets to reprice. In addition, the U.S. economy is performing better than other major regional groups, including the euro zone. Most of the surprising economic growth continues to come from the United States.

“It’s also because every time there’s a shock on the geopolitical front, there’s a rush for quality products, which is good for the dollar. If events continue to happen in the Middle East, these shocks will cause energy prices to spike, and these shocks will have a relatively less impact on Europe and Japan. larger, but will have little impact on the more energy independent United States,” Yrigoyen said.

The war shock had a negative impact on U.S. stock indexes and cryptocurrency markets. Investors are finding that they can mitigate some of their losses by exploring sound investment alternatives, including gold and the U.S. dollar.

According to British financial institution IG, investors have begun to recognize the U.S. dollar as a potentially reliable investment option during times of severe economic distress.

What does a strong dollar mean for Americans?

For Americans, the purchasing power of the dollar is higher and consumption will remain strong. People may travel abroad more and buy luxury goods in Europe, a phenomenon that happened in 2022 when the dollar was high. Additionally, imported products are cheaper for the United States, so more may be imported.

A strong dollar also means that the United States can maintain economic influence and provide fast and cheap borrowing for U.S. industrial policies and social programs.

What does the rising dollar mean to the world?

Yrigoyen said, “This is not necessarily a bad thing for other economies, because if your currency weakens, it should help your exports, and that is how the global economy rebalances. However, a strong dollar is not “It’s an exogenous shock, but it’s the market’s endogenous reaction to the fact that the United States is outperforming other countries.”

Bloomberg believes that a major driving force behind the dollar is American “exceptionalism.” Much of the world economy is growing only modestly, but U.S. data from jobs to retail sales to inflation regularly beat analysts’ expectations, helping to push the dollar higher.

“I don’t think the dollar will weaken unless there is more convergence in economic growth or monetary policy. The path for dollar weakness is very narrow, and that typically happens when China outperforms the U.S. relative to trend, or Geopolitical risks disappear.”

But he said he still doesn’t see China’s economy doing better than the United States, and everything indicates that geopolitical risks will still exist between now and the U.S. election.

Impact on the RMB

Official data from the People’s Bank of China, China’s central bank, showed foreign exchange deposits rose to $832.6 billion in March from $778.9 billion in September last year. This means that some Chinese companies have been reluctant to convert foreign exchange earnings into yuan.

The development comes amid a weakening yuan, which has fallen nearly 2% against the dollar so far this year and is now at a five-month low. The long-term trend is more negative, as the yuan has depreciated by 5% since the beginning of 2023, making many Chinese companies reluctant to exchange dollars for yuan.

On April 16, the onshore and offshore RMB exchange rates against the U.S. dollar both fell to five-month lows, with the onshore price closing at 7.2396 RMB per U.S. dollar, a five-month low.

The trend also illustrates the challenges facing currencies such as the yuan in a world dominated by the dollar. It will not be easy to replace the mighty US dollar as the world’s preferred reserve and trading currency, which has recently risen simultaneously against many major currencies, especially the Chinese yuan, Japanese yen and Indian rupee.

Recent data from the International Monetary Fund (IMF) also confirms that the US dollar remains king. Data released by the IMF at the end of March showed that the U.S. dollar accounted for nearly 60% of global foreign exchange reserves.

Analysis by ING Bank shows that the U.S. dollar’s share of global foreign exchange reserves rose slightly by 0.2% in 2023, while the RMB’s share fell year-on-year for the second consecutive year.

Editor in charge: Ye Ziwei#

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