Xinhua News Agency, Beijing, March 25th, Financial and Economic Observations: Contrarian "strong dollar" may increase financial market risks
Xinhua News Agency reporter Ouyang Wei
Since the global financial market turmoil caused by the new crown pneumonia epidemic, the stock and crude oil markets have been hit hard, and even the traditional safe-haven asset gold prices have fallen. At a time when most of the world's assets are experiencing a "no-sale" frenzy, only the US dollar has recently strengthened against the backdrop of the Federal Reserve's continuous interest rate cuts and the introduction of a series of quantitative easing policies. The market is worried that the continued strength of the US dollar may exacerbate turbulence in global financial markets.
Multiple factors push up the US dollar exchange rate
Since the beginning of March, the Federal Reserve has taken measures such as sharp interest rate cuts and quantitative easing to inject liquidity into the market to deal with the impact of the epidemic. However, the exchange rate of the US dollar rose instead of falling: on March 18, the US dollar index measuring the exchange rate of the US dollar against six major currencies broke through the 100-point mark, and soon reached 101, a three-year high. On the 19th, the US dollar index continued to rise and stood above 102.
Analysts believe that the recent deluge in financial markets has caused deleveraging to accelerate, and investors ’extreme risk aversion has led to a surge in demand for the US dollar, which is the main reason for the recent strengthening of the US dollar.
After the international financial crisis in 2008, US monetary policy continued to be accommodative. While achieving a 11-year bull market for US stocks, it also significantly increased the market's leverage. Recently, U.S. stocks have plummeted. This month, the fuse mechanism has been triggered many times, causing market panic. In order to avoid the risk of liquidation caused by insufficient margin and to deal with a large number of redemptions by fund investors, institutional investors sell assets in exchange for US dollars to add margin or pay to fund investors. This triggered a rapid increase in demand for the US dollar, which in turn pushed up the exchange rate of the US dollar. From the recent trend of the US dollar index, it is not difficult to see that the US dollar index began to enter the rising channel after the US stocks triggered the fuse mechanism on March 9.
In addition, market worries about the world economy falling into recession, extreme risk aversion and deflationary expectations have risen, leading to "cash is king" becoming the mainstream mentality of investors. The most liquid currency, the US dollar, has become the most attractive safe-haven asset. Traditionally safe-haven assets such as gold and U.S. Treasury bonds, which are relatively weak in liquidity, have been sold off.
Peter Bockwall, chief investment officer at Blickley Consulting Group, told the Wall Street Journal that the sell-off of US Treasuries meant that the market mentality had collapsed. "Now that they are starting to avoid U.S. Treasuries, it means that nothing really is safe except cash."
A recent survey conducted by Bank of America Securities on global fund managers showed that as of March 16, the average cash holdings of global fund managers rose from 4.1% in February to 5.1%, close to the level of 5.5% during the 2008 financial crisis. .
At the same time, the "seesaw effect" caused by the depreciation of the euro, pound and other major currencies also pushed the dollar index higher. The US dollar index is used to measure the exchange rate of the US dollar against major currencies such as the euro, the pound, the Canadian dollar, the Japanese yen, the Swedish krona, and the Swiss franc. Among them, the euro has the largest weight, exceeding 50%. Europe is currently becoming the epicenter of the epidemic, and the economy has been significantly impacted, causing the market to be bearish and to sell euros, pounds and other European currencies. With the depreciation of currencies such as the Euro, the US dollar index rose accordingly.
Strong US dollar may increase financial risks
Analysts believe that the continued strength of the US dollar may further trigger a chain reaction. Following the stock market and oil market, the market is worried that the foreign exchange market will become a new storm center.
On March 19, the exchange rate of New Zealand dollar against the US dollar fell below the 1: 0.55 mark, a record low since March 2009; the Australian dollar fell to a ratio of 0.5511 to the US dollar, a record low since October 2002; the British pound fell below the US dollar 1 was 1.15, the lowest since March 1985. In terms of emerging market currencies, the Russian ruble, Indian rupee, South African rand, and Mexican peso have all hit record lows. The Swiss franc and yen also fell to their lowest levels in weeks. Non-U.S. Currencies have suffered a systematic "shock."
Historical experience shows that the strong dollar cycle in most cases will increase global economic and financial market risks. On the one hand, the appreciation of the U.S. dollar will increase the volatility of commodity prices denominated in U.S. dollars. On the other hand, it will also increase the cost of repaying U.S. dollar debt and the pressure on debt in emerging market economies, especially those with high external debt, a single economic structure, and external reserves. Economies with high levels of shortages and inflation.
With the dual impact of the appreciation of the US dollar and the spread of the epidemic, many emerging markets and low-income countries are facing severe challenges, and their domestic economic activities will be severely impacted.
Whether the Fed's water release can curb the dollar's rise
Recently, the US Federal Reserve has cut interest rates to zero interest rates continuously and introduced a series of quantitative easing policies. The total size has even exceeded the period of the financial crisis, but why the US dollar exchange rate remains strong?
Experts point out that the Fed's measures such as interest rate cuts, repurchases, and quantitative easing are mainly targeted at first-tier dealers in the open market and banking financial institutions. In fact, banks are not short of liquidity at present, but in the context of economic weakness and rising corporate credit risk caused by the epidemic, banks are unwilling to take risks to lend because the spreads they earn may not be enough to cover corporate bad debts or counterparty defaults Loss.
Some analysts believe that the tight liquidity of the US dollar reflects the problem of liquidity mismatch. At present, the demand side of the US dollar is mainly the stock market and non-financial companies, but the US dollar supply is concentrated in primary dealers, commercial banks, and financial companies. In addition to the restrictions of existing US laws, the stock market cannot obtain sufficient funds from banks and other institutions. This resulted in ample liquidity in the US interbank market but insufficient liquidity in the stock market.
In order to support the US economy to cope with the impact of the new crown pneumonia epidemic and support the smooth operation of the market, the Fed has recently launched an “unlimited” quantitative easing policy. Affected by this, the rally of the US dollar index has been temporarily frustrated. However, if the epidemic continues to worsen and financial markets continue to be turbulent, it remains to be seen whether the Fed ’s rare “big water release” can fundamentally resolve the tight dollar liquidity in the market and curb the dollar ’s gains.