Preface
Once the U.S. dollar was like an unstoppable emperor, ruling every corner of global finance. Now the emperor seems to be in trouble, and his global dominance is being eroded by one rate hike after another.
Historically, the U.S. dollar once accounted for as much as 70% of global payment currencies, but this figure has fallen to less than 40% at the beginning of 2022. This is not only a reduction in numbers, but also a major imbalance in global trust in the dollar.
In fact, each rate hike is supposed to be a moment for the dollar to show its economic strength, but the status quo is inadequate. A series of interest rate hikes in 2022, originally intended to stabilize the dollar's position, failed to prevent its influence from continuing to decline.
This is evidenced by the volatility of the dollar index, from a rare drop below 90 points in May 2021 to subsequent hovers, each of which reflects not only the market's unease, but also the challenges facing policymakers.
The complexity of the U.S. economy makes every policy adjustment uncertain, and the dollar's position as the currency of choice for global payments is being eroded by other currencies such as the euro.
One. The Fed's Dilemma: Internal Divisions and a Crisis of Public Confidence
Against the backdrop of the gradual decline of dollar hegemony, the Fed's arena is becoming more and more complex, full of internal divisions and external criticism. Especially today, when inflation is rising, the dissatisfaction of the American people with its monetary policy has reached a boiling point.
Powell, as Fed chairman, has become a public target, with many outspoken critics for his failure to deal effectively with economic pressures, and some have even called him the worst Fed chair in history.
Behind this public discontent is a direct conflict between successive interest rate hikes and high price living pressures. As the cost of living soars, the daily life of the average American has been severely impacted.
From the price of food in supermarkets to the price of gas at gas stations, from the skyrocketing rental market to the increase in medical costs, the power of inflation is being demonstrated around almost every corner.
In such an environment, interest rate hikes seem to be a double-edged sword, both in an attempt to tame inflation and in an effort to increase borrowing costs and make economic activity harder.
In the face of such a dilemma, the Fed is not monolithic internally. On the one hand, some economists strongly recommend continuing to raise interest rates to curb inflation; On the other hand, there are also concerns that excessive interest rate hikes may dampen economic growth and even trigger a recession.
This divergence has put Powell's decision-making on a tightrope, and every step could be an abyss. Even more problematic is that these economic decisions are not just technical issues, they are deeply rooted in the political soil.
In this high-pressure and contentious environment, every decision can become a tool for political offense and defense, whether for or against, often with more complex interests behind it.
Two. A Global Perspective: Currency Wars and the Future of the U.S. Dollar
At a time when the Fed is facing internal divisions and a crisis of public confidence, the dollar's front has expanded to the global stage. In this chapter, we will see that the dollar is not only being challenged domestically, but also facing fierce competition from the euro, the yen and the renminbi for its international supremacy.
As the global economic landscape changes, this currency war not only affects the flow of international trade, but also redefines the global balance of power in the economy.
In this seemingly invisible war, the US dollar is trying to consolidate its global advantage through strategic monetary policy. The United States has frequently used financial strategies in Asia to try to limit the development of other major currencies, particularly the yen and the renminbi.
For example, although the Fed's interest rate hike policy is mainly for domestic economic considerations, it also affects the exchange rate of the yen and the renminbi, and indirectly adjusts the trade balance. The use of this strategy is a double-edged sword, which could stabilize the position of the dollar on the one hand, and on the other hand, it could trigger countermeasures by other countries, which in turn could exacerbate the uncertainty of the global economy.
At the same time, the continued steady growth of the eurozone and the monetary policy of the European Central Bank are also quietly strengthening the euro's position as an international payment currency. China's economic expansion and its efforts to internationalize the renminbi have brought new competitive forces to the global currency market.
These are challenges that the dollar cannot afford to ignore. In particular, the renminbi's share of global payment currencies is increasing year on year, reflecting China's growing influence in the global economy, which undoubtedly poses a long-term threat to the dollar.
Three. The way forward for the U.S. economy: the risks and possibilities of interest rate cuts
In the curtain of the global currency war, the United States is facing not only external competitive pressures, but also major choices in its internal economic policy.
Cutting interest rates has become a double-edged sword, potentially providing temporary relief to the US economy or triggering a larger financial crisis. This section will explore the possibility of a rate cut and the significant risks that come with it, and how this decision could rewrite the future of the US economy.
Interest rate cuts are often seen as a means of stimulating economic growth, incentivizing investment and consumption by reducing borrowing costs. In the current economic climate, the side effects of such policies may far outweigh their short-term benefits.
A rate cut could lead to capital outflows, which could accelerate, especially as global investors anticipate a continued weakening of the dollar.
A large outflow of capital would have a direct impact on the U.S. stock market, and could even trigger a stock market crash, affecting the stability of the U.S. financial system. The commercial real estate market may also be over-inflated by falling financing costs, increasing the risk of a bubble in the market.
The potential consequences of such economic policies put U.S. economic policymakers in a delicate position. On the one hand, they need to avoid a repeat of the Great Depression of the 1930s, a history of prolonged global economic downturns due to policy mistakes.
On the other hand, they must ensure that current economic policies are flexible enough to respond to a rapidly changing global economic environment. The Fed may need to reassess its strategy in the coming months, looking for the sweet spot between stimulating economic growth and guarding against financial risks.
epilogue
At this critical juncture, the Fed's strategic choices will profoundly affect the direction of the U.S. and global economy. If the dollar's policy adjustments are implemented prudently, it will not only avoid a potential economic collapse, but also open up a new growth path for the US economy. The success of all this depends on whether the Fed can accurately grasp the pulse of the economy and formulate a strategy that truly adapts to the current global economic situation.