The timing of the Fed's withdrawal from monetary tightening is being delayed again and again! Behind the scenes, the CPI data, which is regarded as a "weather vane" indicator by the Federal Reserve, has once again "exploded"!
According to the data, the US CPI rose by 3.5% year-on-year in March and 0.4% month-on-month. Core CPI, which excludes food and energy, rose 3.8% year-on-year and 0.4% month-on-month in March, both exceeding market expectations. This also convinced the market that the timing of the Fed's rate cut would be broken again.
Swap pricing shows that traders have pushed the timing of the first rate cut from September to November this year, with the rate cut being about 40 basis points. Smart institutional investors on Wall Street, including Goldman Sachs, are expected to cut interest rates only twice this year!
With the postponement of interest rate cut expectations, the dollar index has once again risen to above $100, and non-US currencies, especially in Asia, have accelerated their depreciation.
The CPI has exploded
Among the Asian currencies, the depreciation of the yen has been the hardest hit in recent days. Since April 21, the yen's exchange rate against the US dollar has been directly pointed at the 160 mark, which is a 34-year low. Since the beginning of the year, CICC's foreign exchange estimates show that the yen has depreciated by about 8.6% against the US dollar, making it the weakest G10 currency and the weakest Asian currency.
In addition to the Japanese yen, Asian currencies such as the South Korean won, the Indonesian rupiah, and the Philippine peso have been hit.
Recently, the exchange rate of the South Korean won against the US dollar once fell below 1,400 won to 1 US dollar. Since the beginning of this year, the South Korean won has depreciated against the dollar more than during the global financial crisis. On April 16, the rupiah fell below the 16,000 rupiah mark against the US dollar, hitting its lowest level in four years, making it the sharpest decline among Asian currencies.
The sharp depreciation of the currency has also attracted the voice of governments to protect the exchange rate!
According to Xinhuanet, the previous meeting of the finance ministers of the United States, Japan and South Korea said that the three countries "recognize the serious concerns of Japan and South Korea about the recent sharp depreciation of the yen and South Korean won" and will consult closely on the volatility of the foreign exchange market. Bank Indonesia recently raised three main interest rates by 25 basis points to "strengthen the stability of the rupiah exchange rate". However, despite the constant voices of countries intervening in currency devaluation, the effect of depreciation is really "a drop in the bucket".
In the global monetary system, the consensus on the use of US dollars for settlement has led to the rise of US interest rates, which has always supported the strengthening of US dollar prices, resulting in a decline in the value of the other party's currency. In international trade, depreciating currencies will endlessly drive inflation up in various countries.
Japan is highly dependent on imports for energy and raw materials, and the depreciation of the yen has pushed up production costs at the source, causing the prices of food and daily necessities to continue to rise.
When CCTV News interviewed local people in Japan, some store operators said that food products were greatly affected by the depreciation of the yen, candy has generally become a small package of less than 100 grams, and the number of bean instant food products has also been reduced from more than a dozen to only 6.
The situation in South Korea has also been worse, with the prices of everyday agricultural products skyrocketing. According to data released by Statistics Korea, South Korea's consumer price index has been above 3% for two consecutive months in March. The price increase of agricultural, livestock and aquatic products reached a new high in the past two years and 11 months.
According to chemical fiber headlines, in 2023, many textile companies doing foreign trade said that there is a demand from customers, but because of the Federal Reserve's interest rate hike, they can't apply for foreign exchange, so they can't place orders.
According to the observation of industry insiders, among non-US customers, there is also an increase in buyers asking for price reductions, deferred payments, and cancellations.
A strong dollar, the source of the crisis?
Due to interest rates and hedging needs, the strong performance of the US dollar has once again attracted international funds from all over the world.
The Fed's expectations of a rate cut have decreased, and Treasury rates have soared sharply again. On April 25, the yield on the US 30-year Treasury bond rose to 4.81%, the highest since November 9 last year, and became an important hook to attract international capital.
Due to the rise of emerging technologies, there is also a lot of talk that the United States is leading the economy. The International Monetary Fund (IMF) expects the U.S. economy to grow twice as fast as the other G-7 countries. In addition, the AI boom has also spawned a flood of money into the US stock market.
Peter Vassallo, portfolio manager at BNP Paribas Asset Management, said, "What's unique now is that the US dollar yields so high. If you're a global allocator and you're managing your portfolio, how easy it is to boost your risk-adjusted returns: buy unhedged, short-term U.S. Treasuries. ”
The repatriation of the dollar has not been a good thing for most emerging countries.
Xinhua News Agency quoted the "Nihon Keizai Shimbun" in 2013 as saying that after the global financial crisis in 2008, the United States was the epicenter of market fluctuations.
Desmond Rahman, an economist at the American Enterprise Institute, previously said that the Fed's policy has led to a sharp appreciation of the dollar, capital flows back from emerging markets, and higher interest rates have exacerbated the debt risks of emerging economies, making the world economy worse.
Many of the countries in Southeast Asia are still in an environment of high current-account deficits, inflation and external debt levels. The sharp depreciation of the local currency has exerted tremendous pressure on the repayment of its external debts and has put continuous pressure on the economy.
From 2024 onwards, the six Southeast Asian countries will adhere to the general direction of fiscal consolidation and make every effort to reduce their fiscal deficit ratios.
According to Industrial Securities, in February this year, Indonesia's cabinet meeting approved the new annual government work plan and the formulation of macroeconomic framework and fiscal policy principles for 2025, and the government's goals include maintaining the deficit of the draft national budget at 2.48% to 2.8% of GDP.
In January this year, Thailand's cabinet meeting approved the budget proposal for fiscal year 2025, and the budget deficit increased by 2.89% year-on-year to 3.56% of GDP, continuing to decline from 3.64% in 2024. In fact, Thailand's Ministry of Finance has implemented a number of measures, including persistent budget deficits, real estate investment incentives, and tourism promotion programs, to stimulate the macroeconomy.
epilogue
The strong return of the US dollar has led many scholars in the industry to discuss whether the crisis of 1997 will be repeated.
Tao Dong, director of the China Chief Economist Forum, believes that there is not much opportunity. Because the fundamentals of Asia's economy are very different today than they were 27 years ago.
At that time, Asian countries were overleveraged and owed huge amounts of US dollar debt; today, most Asian countries have low levels of external debt compared to their own economies, and the ratio of short-term debt to foreign exchange reserves is mostly appropriate. Moreover, the proportion of industrial investment in the inflow of foreign capital has increased significantly, and these funds are generally not affected by interest rates.
The strong dollar position fueled by high inflation in the United States not only means that inflation in the United States remains severe, but also puts pressure on other currencies, but this is an outcome that no one wants to see.
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