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Facing high inflation, banking turmoil, and long-running disputes over the US Treasury ceiling;
The Fed has acted hastily amid international pressure and domestic political turmoil: raising interest rates, shrinking its balance sheet, and bailing out the market.
In 2024, the global economic situation will be changing, and the sudden financial turmoil will make the Federal Reserve have to show its sword again, and a drama called "dollar self-help" will be staged in the global financial market.
However, this series of measures has caused currency waves in the global market:
Europe is cautious and wait-and-see, while East Asia is in advance of a currency war.
The Fed's "Dollar Bailout"
Federal Reserve Chairman Jerome Powell seems to be stable, but in fact he is anxious.
In March 2024, the impact of successive interest rate hikes triggered a ripple effect in the U.S. banking sector:
A number of regional banks have exposed asset quality problems and some have failed.
Although the Fed has stabilized the market through emergency capital injections and easy lending facilities, the lack of confidence has been difficult to compensate, and consumers and investors have withdrawn from bank deposits and sold off risky assets on a large scale.
In the face of huge inflationary pressures, the Federal Reserve continued to raise interest rates to 5.75% in an attempt to ease the rise in prices by tightening money.
However, this move has led to a liquidity crunch for the US banking sector, with bond yields soaring and market turmoil.
In response to the market panic, the Fed was forced to stop shrinking its balance sheet and inject trillions of dollars into the repo market to ensure liquidity.
This series of moves by the Federal Reserve was interpreted by the market as "the dollar bailing itself out".
However, this "self-help" action has caused the US dollar to fluctuate sharply and global markets to be volatile, especially in Europe and East Asia.
Europe wait-and-see: a cautiously balanced monetary policy
At the ECB headquarters, President Christine Lagarde reacted cautiously to the Fed's emergency actions.
Although inflation is also high in Europe, the ECB has had to balance monetary policy carefully due to the slowdown in economic growth.
The data shows that inflation in the eurozone will remain as high as 7% in 2024, well above the target level.
However, the Russia-Ukraine conflict, energy shortages, and supply-demand imbalances remain severe.
In response to inflation, the ECB maintained a relatively hawkish stance on raising interest rates, raising rates to 4%, but at the same time adopted a series of easing measures to support the market:
Continue to buy Treasury bonds, provide low-interest loans, and allow banks to relax asset quality requirements in stress tests.
However, the Fed's actions have left Europe with a choice:
On the one hand, if the Fed continues to raise interest rates, it will have a greater impact on Europe's fragile economy;
On the other hand, if no action is taken, there will be a massive outflow of capital, and the euro may depreciate again.
European governments have taken mixed attitudes towards this, and in the end they can only adopt a relatively dovish "wait-and-see" strategy, waiting and waiting for the Fed's next move.
East Asian Currency Wars: The Game of the Renminbi, the Yen and the South Korean Won
Under the emergency action of the Federal Reserve, East Asian countries have launched a currency defense war.
First, the renminbi took a hit.
Despite the strong recovery momentum of China's economy in 2024, the renminbi briefly depreciated to the 8 yuan mark against the US dollar in the face of the strong appreciation of the US dollar and the attraction of high interest rate policies in the United States, causing market concerns.
To this end, the People's Bank of China acted quickly to stabilize the RMB exchange rate through reverse repurchases, foreign exchange reserve intervention, and reducing the reserve requirement ratio.
At the same time, the government has also introduced a series of policies to encourage exports, boost domestic consumption, and strengthen financial cooperation with countries along the "Belt and Road" to promote the internationalization of the renminbi.
The Bank of Japan is also drawn into this currency war.
In January 2024, the Bank of Japan adjusted its "yield curve control" policy, raising the 10-year government bond yield target from 0.25% to 0.5% in an attempt to curb the yen's depreciation.
However, the Fed's interest rate hike and the dollar's rescue efforts hit the Japanese market directly, and the yen quickly fell below 150 against the dollar.
In order to prevent capital outflows, the Japanese government and the central bank launched an intervention mechanism in March 2024 to directly buy yen in the market and maintain exchange rate stability.
At the same time, the Bank of Korea is under pressure in this currency war.
Since the economy is highly dependent on exports, the won is extremely sensitive to fluctuations in the US dollar.
After the Fed raised interest rates, the won fell rapidly against the dollar, exports suffered, and domestic inflation soared to 6%.
In response, the Bank of Korea was forced to raise the interest rate to 4.75% and use its foreign exchange reserves to stabilize the exchange rate.
The new global landscape under the currency war
The dollar is rushing to save itself, Europe is cautious and wait-and-see, and the East Asian currency war - this scenario is a microcosm of the global monetary landscape in 2024.
Against this backdrop, the monetary policies of countries are no longer independent, but are directly influenced by the policies of the United States.
The Fed tried to stabilize the dollar by raising interest rates and shrinking its balance sheet, but it triggered a new currency war on a global scale.
The ECB and East Asian countries face a dilemma: to stabilize their own economies while preventing capital outflows and currency depreciation.
Behind this currency war is a contest between the monetary policies and economic structures of various countries and the global financial landscape.
For the Fed, the dollar's "self-rescue" action is only a temporary victory, but it remains to be seen whether it can truly stabilize global markets and rebuild financial confidence.
For Europe and East Asia, the currency wars highlight the interdependence and game of countries in the global economic system.
Whatever the outcome, 2024 is destined to be a significant year in the history of global finance.
The monetary policies of central banks will continue to adjust in this storm, and the war between currencies will continue, ultimately pushing global financial markets into a new pattern.
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Text: Wind
Audit|Ancient Oasis, Thousand Trees