With the Fed tightening monetary policy faster, scorching U.S. inflation expectations and traders questioning the Fed's ability to prevent the economy from slipping into recession, Fed Chairman Jerome Powell reiterated in a policy meeting statement on May 5 that "inflation is ridiculously high and long-term upward inflationary pressures remain" and hinted that rate hikes could continue by 50 basis points in the next two meetings (75 basis points since March) until inflation is under control, Powell said, "The rate of balance sheet reduction will be faster than last time, Announced in June that the balance sheet has been reduced.".
Fed Chairman Jerome Powell
This means that the Fed, under the current pressure of the Russian-Ukrainian conflict-induced sharp price increases, has formally relented in the policy of normalizing currency interest rates, and will raise the borrowing costs of the dollar faster and sharper than the market expects (the dollar interest rate rises), officially issuing the strongest currency turn signal.
You know, the core logic of financial asset price fluctuations is the expansion rate and expectations of the balance sheet, which means that the Fed officially throws the nuclear bomb that detonates the US financial market, and it means that the suction effect of this round of strong dollar index cycle on the market will begin in advance.
Dollar index and historical events
According to a new survey of Forex strategists released by Reuters on May 6, most of the recent gains in the dollar index will be retained at least until the fourth quarter of 2022, please note that most of these surveyed strategists have been thinking that the dollar will weaken for many years, but now they have changed their views.
On May 6, the dollar index rose 1.16 percent to 103.94 at one point, the dollar against a basket of currencies hit its highest since December 2002, and the pound fell 2.25 percent against the dollar at $1.2351. Eur/USD hit $1.0518, down 0.98 percent, and while the sharp sell-off in U.S. equities boosted demand for the safe-haven dollar, the Fed is seen as tightening monetary policy more than other major central banks.
The data shows that the US index has risen more than 14.0% since the beginning of last year, about half of which was set in 2022, and this rally shows little sign of abating, as the Fed just raised interest rates by the market on the 5th of 50 basis points and opened the door to several rate hikes in the coming months to curb the highest inflation rate in 40 years.
With the rise of the dollar index, in the supply chain bottleneck and international oil prices to maintain a high level to push up inflation, because the dollar dominates the global foreign exchange and international trade of the currency status, which also allows the US economy to its own growing debt deficit, financial and inflation risks to the global market, which also means that the negative spillover effect of the Fed's tightening monetary policy will affect some markets with a single economic structure, high external debt and shortage of foreign reserves.
According to data released by the US Treasury Department on May 6, the US federal debt has exceeded $30.42 trillion on May 5 due to the high borrowing and deficit accumulated during the continuous spread of the new crown virus to stimulate the economy (please refer to the chart below for details of the specific debt deficit), which is a shocking figure three years earlier than previously expected.
According to data monitored by Reuters on May 1, the U.S. Treasury Department and the U.S. Federal Reserve website show that since March 2020, the U.S. Treasury and the Fed have printed a total of 35 trillion yuan of basic currency liquidity, balance sheet purchases, increased debt ceilings, 2022 budget deficits and economic stimulus packages in the past 38 months, although, The Fed has already raised interest rates by 75 basis points in March and will draw down its balance sheet from June ($65 billion to $95 billion per month), but these debts are growing only at a slower pace than before, not really stopping, and the line below perfectly illustrates the process.
In this regard, Goldman Sachs expects that the official opening of quantitative tightening in the United States will hurt the liquidity of the global market, at the same time, the Fed has launched a large-scale balance sheet reduction in stages since June, which will lead to the depletion of excess reserves, and the US financial website Zero Hedging analyzed on May 5 that the Fed may eventually cut its balance sheet by $50,000 (currently about $9 trillion), which will put upward pressure on the effective federal funds rate and short-term Treasury yields. This trend may be more pronounced as dollar liquidity shifts from flood to drought at the bottom.
In response, Goldman Sachs released a report on May 6 that some vulnerable markets will have a "dollar shortage" in the second quarter of 2023, and as early as March, IMF President Georgieva had warned that some vulnerable emerging economies must prepare for US interest rate hikes, especially those with higher DOLLAR debt.
For example, the Wall Street Journal reported on May 5 that Sri Lanka's available reserves are now close to zero, and Sri Lanka's finance minister said the country's current severe economic crisis is expected to continue for at least two more years. At the same time, he warned that Sri Lanka was about to have a "money shortage", saying that the foreign reserves were about to run out, and it was difficult to continue to maintain economic operations. According to the analysis of India's Business Standard, the reason for this dilemma in the country is mainly due to the heavy blow to the tourism industry that has enabled the country to obtain the main source of income from foreign reserves since the global public health crisis, and then superimposed on the tightening of global dollar liquidity expectations and inflation and other factors to cause economic risks, resulting in a sharp decline in foreign reserves.
In this regard, a latest report cited by Bloomberg earlier pointed out that the US debt deficit and high inflation risks are using the tightening dollar cycle to pass on to some vulnerable countries, in addition to Sri Lanka, including Argentina, Lebanon, Brazil, Pakistan, India, Vietnam, Turkey, Egypt and Indonesia and other 10 countries or will face the dilemma of dollar shortage or high dollar financing costs due to high foreign debt and foreign reserves.
In the past two months, the sharp shock in the Vietnamese market also means that the dollar's absorption effect on some vulnerable economic markets has begun ahead of schedule, and international institutions said in the latest report released last month that because the Vietnamese economy may approach the debt ceiling of 67% of the country's gdp by the end of 2022, it has listed the country as the country most in Southeast Asia that needs to consolidate its finances.
In a report published on April 21, the International Monetary Fund warned Vietnam of inflation and financial risks, such as the Fed's tightening of monetary policy and the Russian-Ukrainian conflict, which could have a far-reaching impact on the pace of Vietnam's economic recovery and a sharp rise in inflation.
Investors view the trading board inside the Ho Chi Minh Stock Exchange building
According to a new report by the Vietnam Express, the IMF expects inflation in Vietnam to reach 3.9 percent by the end of the year. Other direct risks include global financial conditions, supply chain shortages, and developments in real estate and corporate bond markets, which show Vietnam's economy will grow by 2.6 percent in 2021, well below the 7 percent growth trend of the year 2020. This poses a threat to highly valued assets represented by Vietnam's real estate and stock markets, and it is easy to form a domino effect once an economy has a financial and monetary crisis.
BWC Chinese Network Finance team noted that this kind of early vivid case of the suction effect can refer to Venezuela, Zimbabwe, and the recent cases can also refer to the economies of Sri Lanka, Brazil, Argentina, Turkey, Indonesia and Lebanon, which have also fallen into a fragile pattern of currency and debt crises, which will become more difficult in the context of uncertainty in the global public health crisis and the transfer of high inflation and debt deficits in the United States, which we also call the economic "glass eight countries".
A corner of vietnamese cities
According to the current data and analysis, considering the risk level of inflation upside, external dollar debt and external dependence of the supply chain economic structure, the Vietnamese economy is likely to inevitably fall into the ninth fragile economy to become the "new glass country" in the financial market. Vietnam and India have been happily immersed in the dollar debt trap for years, and some have traded with Wall Street interest groups, which will become more clear in a market environment of high oil prices, supply chain shortages and the Fed's strongest currency tightening signals.
Although the Vietnamese economy is undergoing many economic reforms and has obtained some eye-catching economic data in the past decade, Vietnam is still a low-income country, a major feature is that the external debt is high, mainly agricultural economy, heavily dependent on foreign capital, relying on low-end manufacturing to support the economy, data show that agriculture accounts for 30% of Vietnam's gross national product, agricultural population accounts for 80% of Vietnam's total population, which is particularly easy to think of India, which is known as a "banana economy country" in the pitfall of dollar debt. (End)