RMB Surges 700 Points Amid Failed US Rate Hike
After the Federal Reserve's interest rate meeting in May, it raised interest rates by 25 basis points as expected, and Fed Chairman Powell left some rhetorical "loopholes" for potential future shifts in monetary policy. The US dollar index fell, is no one wanting the US dollar anymore?
US Interest Rate Hike and the Fall of the US Dollar Index
The two-day monetary policy meeting came to an end, and the Federal Reserve raised interest rates by 25 basis points as anticipated. This marks the 10th time the Federal Reserve has raised rates in this cycle, with a cumulative increase of 500 basis points.
Surprisingly, after the rate hike, the US dollar index did not appreciate but instead weakened amidst fluctuations, while the renminbi and gold actually rose.
This phenomenon is something the United States is extremely reluctant to see. The strength of gold and the weakness of the US dollar index signal an acceleration in the global move away from the US dollar. It is likely that the Fed's top officials are also very worried and cannot allow this trend to continue unchecked; they must intervene.
As of 11:00 AM Beijing time on May 5th, the US dollar index was reported at 101.28, which is a decrease of 11.78% from its highest point in October last year.
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However, after October last year, the Federal Reserve continued to raise interest rates, but the US dollar index continued to decline, causing great discomfort for the Federal Reserve.
Although there was a rebound during the decline, it only lasted for a month before the index stepped back into a downward trend.
It is worth mentioning that the trend of the US dollar index is of great significance to the US economy.Now, the U.S. dollar interest rate has soared to 5.25%, while the U.S. dollar index is fighting to defend the 100-point threshold, which is quite ironic.
It is well known that since the Federal Reserve started the interest rate hike cycle, many countries in the world are in a state of dollar scarcity, and many countries, even the United States itself, are eager for the U.S. dollar.
However, since last October, when the U.S. dollar index reached a high of 114.8, the U.S. dollar has been falling all the way, as if no one wants it anymore, which is particularly contradictory to the previous eagerness for the U.S. dollar.
After the Federal Reserve announced its interest rate decision, it still did not make a clear decision on whether to stop raising interest rates. Powell also emphasized at the press conference that the inflation rate "will not" decrease quickly, implying that the Federal Reserve will maintain a high interest rate space for a longer period.
The purpose is also well understood by everyone, that is, to boost market confidence and lift the U.S. dollar index.
If the Federal Reserve stops raising interest rates now, the U.S. dollar will weaken, and the effect of harvesting the wealth of other countries in the world will diminish.
A strong U.S. dollar is more attractive to the currencies of other countries, and a large amount of funds will flow back to the United States, which is also conducive to U.S. debt issuance.
Countries around the world are de-dollarizing, and U.S. debt is being sold off. At this time, the United States does not want the U.S. dollar index to weaken.
Once the U.S. dollar index weakens, other countries in the world may look for new currencies to replace the U.S. dollar, making it difficult for the United States to easily transfer its heavy debt pressure and high inflation, which is very dangerous for the financial assets within the United States.
However, a series of bank failures and bond market crises have forced the Federal Reserve to reconsider its monetary policy and suspend tightening interest rates. If high interest rates lead to financial explosions, credit will also be greatly reduced, and how can it still be the world's big brother?Is the US Dollar Hegemony Collapsing?
What does the rise in the US Dollar Index and gold prices signify?
The US Dollar has long been perched on the throne of the "world currency," but now it seems to be losing its grip.
As the US Dollar Index continues to weaken, the first casualties are likely to be the US Treasury bonds and stocks, which could trigger a massive sell-off. Investors would then turn to safe-haven assets like gold. However, the United States will not allow such an event to occur under current circumstances.
Recently, there has been an ongoing debate between House Speaker McCarthy and President Biden over a bill to raise the debt ceiling, with Treasury Secretary Yellen adding fuel to the fire.
Yellen stated that the United States could default as early as June 1st. If the House of Representatives does not raise the debt ceiling, a government shutdown would be the least of the world's concerns; global instability would be the real threat.
McCarthy, on the other hand, has indicated that he has already secured a bill to raise the debt ceiling by $1.5 trillion. Is that not enough?
Biden, however, is unwilling to accept this $1.5 trillion debt proposal, primarily because he has his own ulterior motives. The House's $1.5 trillion bill comes with additional conditions, and Biden does not want to compromise his promises to the electorate over this debt ceiling proposal. If Biden were to accept the House's bill, he would likely face defeat in the 2024 elections.
Thus, the debt ceiling bill has reached an impasse.However, insiders have revealed that the Biden administration has already begun to weigh other possible options, including a short-term increase in the debt ceiling to buy time for finding a compromise solution.
What can be confirmed now is that the United States will continue to issue Treasury bonds to borrow money.
But the United States' credit is no longer what it used to be, and many countries are actively de-dollarizing, which also indicates that many countries no longer need the US dollar.
The US dollar index is weakening, and those who hold US Treasury bonds are more determined to sell them. At this time, the United States wants to issue debt, will other countries accept it?
Even if the US Federal Reserve remains hawkish, it cannot stop the decline of the US dollar.
Recently, House Speaker McCarthy made shocking remarks on social media, stating that China holds a large amount of US Treasury bonds, which has made the United States lose its competitive advantage in competition with China.
To change the situation of the United States, it should directly default on this huge debt. This way, it can not only cause losses to China but also reduce the debt burden of the United States.
Credit is the foundation of the United States, but now House Speaker McCarthy has a shameless idea, actually wanting to openly violate credit contracts, which is also a contempt for international rules.
If the United States really dares to default on more than $800 billion in US Treasury bonds, it will inevitably cause huge losses to China, and will also accelerate more countries to sell US Treasury bonds, which will inevitably cause global financial market turmoil.
House Speaker McCarthy's idea does not recognize the reality. The reason why the United States can issue a large amount of Treasury bonds, and China will buy US Treasury bonds, is also China's trust in the United States.Without China and other creditor nations purchasing U.S. Treasury bonds, the United States would be unable to continue its excessive money printing, nor could it maintain its economic growth. In other words, China's holding of U.S. Treasury bonds has not impacted the U.S. economy; on the contrary, it has supported the U.S. to a certain extent. The main reason for the United States' defeat in competition with China is the hollowing out of its own industries. Under the mindset of "judging others by oneself," there is always a feeling that China, holding U.S. Treasury bonds, would use its position as a creditor to coerce it into doing things it does not wish to do. Faced with such widespread peculiar perceptions in the United States, the subjective wrong choices of American politicians can also lead to losses in interests.
The United States is experiencing problems at home.
Powell's ambiguous remarks suggest a pause in this round of interest rate hikes, which further exacerbates the decline of the U.S. dollar index. The speed of capital flight will also accelerate further. Although the Federal Reserve's interest rate hike in May was in line with market expectations, it is clear from the policy statement that the Federal Reserve's attitude has changed, which has also brought some relief. However, the subsequent issues of inflation re-emerging and economic recession are also following closely.It is reported that in 2023, three banks in the United States were closed, and the main reason for the bank closures was the continuous interest rate hikes by the Federal Reserve.
As the Federal Reserve further aggressively raises interest rates, the collapse of the three banks is just the beginning, and other parts of the U.S. financial system may also come under pressure.
Gold, as a safe-haven asset, has broken through historical highs, and the main reason is that the market believes that the Federal Reserve's interest rate hikes are coming to an end, and gold is priced in U.S. dollars.
For the United States, what it wants to see most now is the rise of the U.S. dollar and the fall of gold, but the reality is the opposite of what the United States wishes. Not only has gold not fallen, but it has also set a historical high. Isn't this slapping the Federal Reserve in the face?
The rise of gold is actually a deeper level of central banks in other countries increasing their holdings of gold and selling U.S. dollars. For the current economic situation in the United States, the actions of other countries selling U.S. debt and buying gold are undoubtedly undermining the United States.
What is even more uncomfortable for the United States is that Brazil and Argentina use the renminbi for settlement when importing goods from China.
The two largest economies in South America, Brazil and Argentina, have always been considered by the United States as their backyard. In the eyes of Americans, it is a matter of course for Brazil and Argentina to use the U.S. dollar for settlement.
But now they have started to use the renminbi for settlement, which will inevitably promote the renminbi to the world. The People's Bank of China does not need to raise interest rates, and under the push of global demand, the renminbi will rise.
Therefore, after the Federal Reserve's interest rate hike, the renminbi has risen by nearly 700 points in recent days, which is also greatly related to the weakening of the U.S. dollar.
In addition, some time ago, there was a rumor on the Internet that J.P. Morgan was shorting gold. Is this news true or false?It is impossible to determine the authenticity of this news, which could also be a smokescreen released by the United States to harvest "leeks" (a term used in China to describe retail investors who are easily swayed and exploited).
If it is true, it is not surprising, as capital is profit-driven, and JPMorgan Chase has been suspected of colluding with the Federal Reserve to short gold before interest rate hikes to reap huge profits on multiple occasions.
However, it is worth mentioning that the price of gold has not fallen. If JPMorgan Chase really shorted gold, it would face the risk of a margin call.
As the largest bank in the United States, if JPMorgan Chase were to face a margin call, the impact would be significant, and the U.S. government would not stand idly by, but would try every means to save it.
Currently, countries are selling U.S. Treasuries to de-dollarize and are rushing to buy gold, driving up the price of gold.
Once gold flows into many developing countries, it is difficult to freely return to the United States, and there is a motive for the United States to suppress the price of gold.
Countries around the world store their gold in the Federal Reserve's vaults, giving the United States the supply to suppress gold prices, and the United States is controlling the price of gold.
As a gold-producing country, it is natural to hope for a rise in gold prices, but as a rival, the United States would certainly hope for a decline in gold prices.
In the past, when the Federal Reserve raised interest rates, global capital would shun gold and rush to buy U.S. dollar assets, as gold can only generate profits when its price rises, and holding it does not produce actual returns.
From the global trend of de-dollarization, it is evident that confidence in the U.S. dollar has been lost. Instead, the Federal Reserve's interest rate hikes have led global investors and central banks to frantically buy gold to cope with impending risk events.After each financial and credit crisis, the global hegemonic status of the US dollar is facing challenge after challenge. It will become increasingly difficult for the United States to maintain the dollar's dominance. In the face of the trend towards de-dollarization, all efforts by the US will be in vain.
For central banks of various countries and a large number of investors, the joint major move of global central banks this time carries a huge amount of information. A major reshuffling is about to come, which also indicates the failure of the US dollar interest rate hike.