U.S. helicopters throw money, why does the dollar appreciate? How will it affect the RMB?

Chinanews.net Client, March 19 (Reporter Li Jinlei) US stocks continued to plummet, with four fuses in 10 days, so the United States opened a helicopter money-spreading model. Under the big water release, the US dollar index (USDX) hit a new high and exceeded the 100 mark, which means that the dollar is rising and the world is suffering from a shortage of dollars.

At the same time, the exchange rate of the pound and the Australian dollar fell miserably, and the pound hit its lowest level in 35 years against the US dollar. Why is the dollar stronger? Can the RMB exchange rate hold up?

USD index screenshot. From wind

The US dollar index broke through 100 strong, hitting a new high in recent years

On March 18, the US dollar index broke through the 100-point strong mark, setting a new high in the past three years. On March 19, the US dollar index continued to rise and once stood above 101.

The US dollar index (USDX) is a measure of the change in the exchange rate of the US dollar against a basket of currencies. The rise of the US dollar index indicates that the exchange rate of the US dollar with other currencies has risen, that is, the US dollar has appreciated.

Recently, the US Federal Reserve released a big move of "cut interest rates to zero + quantitative easing" and restarted the commercial paper financing mechanism. On March 17, the U.S. government announced that it would “spread money by helicopter” and planned to launch a $ 1 trillion economic stimulus plan.

Why is the US dollar index strengthening against the backdrop of a sharp water release in the United States, and even a dollar shortage?

Tan Yaling, chief economist of the China Foreign Exchange Investment Research Institute, told a reporter from China News that this is a reflection of the market's risk aversion. The U.S. economy was relatively affected by the epidemic, and the U.S. stock market plummeted. At this time, the U.S. dollar was mainly for maintaining confidence and was favored by the world. It became a core safe-haven asset because it was fully exchangeable and fully circulated.

Zhao Xijun, deputy dean of the School of Finance at Renmin University of China, believes that investors are particularly eager to hold cash when they are particularly uncertain about their future expectations, and that cash is the most important way to deal with future uncertainty. Is not optimistic about the future, the greater the demand for cash.

Zhao Xijun said that the Federal Reserve ’s interest rate cuts and quantitative easing policies did not play a role in stabilizing expectations, but instead aggravated market concerns about the future, which led to increased investor demand for cash in preparation for future needs. And because of interest rate cuts, the cost of holding dollars is falling.

"Market participants and investors are very pessimistic about the future. On the one hand, the demand for the US dollar has expanded, and on the other hand, the cost of holding the US dollar has decreased. Many institutions and enterprises have also increased their cash flows to prevent liquidity crises. There is such a tense situation as a shortage of dollars. "Zhao Xijun said.

Wuhan University Economics Economics Tao Tao also believes that in the face of huge unknown uncertainty, the current international financial market has fallen into extreme panic and has sold all realizable assets. Not only risky assets such as stocks have fallen sharply, but even safe-haven assets such as government bonds and gold have also fallen sharply. The market is fleeing to liquidity at all costs, cash is king.

Data map.

Depreciation of multinational exchange rates, GBP hits 35-year low against USD

With the strong rise of the US dollar index, the currencies of many countries have depreciated against the US dollar.

Among them, the pound fell sharply, with a daily drop of more than 600 points, and the pound fell below 1.19 against the US dollar, the lowest level in 35 years. Wind data show that the pound has fallen more than 12% against the dollar this year.

The Australian dollar and the New Zealand dollar fell by more than 4% in a single day. Wind data show that the Australian dollar has fallen about 20% against the dollar this year. The New Zealand dollar has fallen more than 16% against the dollar.

The euro once fell more than 200 points against the US dollar, but recovered part of the decline as the European Central Bank announced its 750 billion euro emergency bond purchase plan. Wind data show that the euro has fallen about 3% against the US dollar this year.

The US dollar index is a weighted index of a series of exchange rates, and the euro is the currency with the highest weight. Zhao Xijun pointed out that the strength of the US dollar index does not mean that the US economy is now better, but that other countries are worse than the US expectations.

"At present, the situation of the European epidemic is worse than that of the United States, affected by the epidemic, coupled with the fact that the European economy itself is not particularly good, the euro as a whole is weaker than the US dollar, which also set off the strength of the US dollar." Zhao Xijun said.

Regarding the trend of the US dollar index, Zhao Xijun believes that the current European epidemic has not yet peaked, and the US dollar's trend depends on which of the United States and Europe has gone faster in the development of the epidemic. If the European epidemic is under control, the US outbreak may reverse and the US dollar will weaken. If the US epidemic is under control and Europe does not control it, the US dollar may continue to strengthen.

Tan Yaling believes that the strength of the US dollar is unsustainable, because the appreciation of the US dollar is contrary to the purpose of US monetary policy, and devaluation is only good for the economy.

Renminbi and US dollar infographic. Photo by Li Jinlei

What is the future trend of the slight depreciation of the RMB exchange rate?

Compared with the exchange rates of other currencies, the RMB exchange rate has not fluctuated significantly recently.

On March 19, the median price of the RMB exchange rate was US $ 1 to RMB 7.0522, down 194 basis points from the previous trading day.

Tan Yaling said that the appreciation of the US dollar and the depreciation of the RMB exchange rate are normal logic, and it is difficult to deviate. At present, the RMB exchange rate remains basically stable, and the tendency of depreciation in the stability is relatively clear. Maintaining a relatively stable currency is beneficial to economic development.

Zhao Xijun believes that the Renminbi is more stable relative to other currencies. As the epidemic situation in China is becoming more and more clear, localities have resumed work and production, the impact of the epidemic has gradually decreased, and the economy continues to recover. With a series of improvements, the market is expected to change Well, the demand for RMB use will also return to normal.

Zhao Xijun said that as the US cuts interest rates, the spread between China and the United States further expands, making the domestic financial market more attractive to international funds. When the economy, expectations, and markets are improving, international funds will increasingly value RMB assets. The renminbi is becoming a risk-averse asset, and the renminbi exchange rate will remain basically stable. (Finish)