The website of the French "Echo" published an article by Nathan At-Kasimi on December 27, entitled "The Collapse of the Dollar, the Great Panic in the Market in 2023". The article pointed out that in 2023, the "dollar oppressors (euro, yen...)" may sound the horn of revenge. The article is compiled as follows:
The magnanimous "King Dollar" spared the weakest opponent in 2022. In the first nine months of this year, the U.S. dollar played a strong role, hurting the interests of other major currencies (euro, pound and yen), but relatively lenient on emerging currencies. Emerging countries central banks have higher real interest rates than developed countries, which better protects and supports their currencies. Some countries, such as Brazil, were the first countries to raise interest rates on a large scale .
In 2023, the "dollar oppressors (euro, yen...)" may sound their vengeance. In particular the ECB and the Bank of Japan will continue to tighten policy, while the Fed rate hike cycle is coming to an end. A U.S. economic recession that markets had been predicting for months prevented the dollar from climbing, halving its appreciation to 7% from 15%.
This year, the dollar is up 18% against the euro, 30% against the yen and 26% against the pound. This is the first time since 2005 that the dollar has risen more than 10% against the other three major currencies. Markets see the Fed as the central bank that really fights inflation. The dollar has enjoyed the dividend of the Federal Reserve's monetary activism, and its excessive strength has begun to hurt the competitiveness of US exports.
Despite the correction in the last quarter, the world's number one currency maintains historically high valuations. Paul Michael, head of foreign exchange strategy at HSBC , believes that in the market's view, "once the Fed stops raising interest rates and economic activity contracts, this overestimation is no longer reasonable. A weak economy will match a weak dollar." In 2020 amid the coronavirus pandemic, the dollar has fallen 15% from its March high and is down 5.5% for the year. When economic conditions deteriorate significantly, U.S. investors tend to sell their foreign assets in favor of domestic Treasuries, which helps support the dollar.
Even a severe recession in the US does not automatically lead to a collapse of the dollar. Since the early 1970s, the U.S. has experienced nine recessions, but the dollar has actually fallen only twice (1972-1974 and 1994-1995). When the Internet bubble burst (1999-July 2000), the dollar only lost 1%. In the 1970s and 1980s, there were only three massive rate hikes by the Federal Reserve that were a key factor in the U.S. recession. Paul Volcker, chairman of the Federal Reserve from 1979 to 1987, raised interest rates by 1,000 basis points between July 1980 and January 1981. This resulted in a 2.1 percent decline in U.S. GDP over a 15-month period (August 1981 to November 1982). Despite a contraction in economic activity and a very tight bond market, the dollar gained 8% on positive real interest rates, which is not the case now. The dollar was not as overvalued back then as it is now.
The U.S. dollar remains the "monetary raw material" necessary for the world's financial operations, just as oil is to the world economy. The excessive volatility of the US dollar in 2023 may cause tension in the entire financial world. According to BIS , non-banks outside the US (pension funds, hedge funds , insurance companies, sovereign wealth funds…) hold There is $25 trillion in short-term debt (less than a year).
, the most liquid and safest currency in the world, is the bridge between currency and market. “An investor who wants to do a swap between Swiss francs and Polish zlotys will first convert the Swiss francs to dollars, and then exchange the dollars for zlotys ,” the BIS explained. It is the big U.S. banks that drive and control this dollar global liquidity outside of the U.S. Foreign banks that don’t have access to U.S. dollars from the Fed borrow $39 trillion through this swap. In 2023, the abundant cross-border mobility during the economic boom may decrease, and there may even be a sharp decline.
source: reference news network
