Is a new round of "Plaza Accord" brewing as a strong dollar hits global foreign exchange and capital markets?

　　Author: Hou Xintong

　　The strong dollar not only caused turmoil in global capital markets including foreign exchange markets, but also increased imported inflationary pressures in other countries, putting pressure on the global economy.

　　In the past week, the central banks or governments of the United Kingdom, South Korea, Japan, or the government have begun to intervene in their own markets, as the pressure of the strong dollar on global capital markets continues to rise.

In the face of more and more countries ending up to maintain stability, how long can the strong dollar last?

Could this pressure and turmoil give birth to the 1985 Plaza Accord-style intervention?

　　The dollar bull market is not over yet

　　Analysts generally believe that the factors that have led to the strength of the dollar this year are still there, and the dollar bull market is not over yet.

　　The institutional view issued by the Office of Investment Director of UBS Wealth Management (CIO) stated that the dollar's rally has not ended, "currently, the dollar's real effective exchange rate is close to the high since 2000, and the dollar is actually quite "expensive" in terms of purchasing power parity, Especially relative to EUR, GBP and SEK. In the long run we believe the Fed can successfully control inflation and when the outlook for interest rates becomes clearer the dollar is expected to weaken from next year. But in the short term we see a bull market for the dollar Not over yet, I raised my view on the U.S. dollar to bullish, suggesting that investors may consider tilting their cash and bond allocations toward the U.S. dollar.”

　　Piero Cingari, an analyst at Capital.com, told Yicai.com: "The dollar still has all the conditions to continue its bull market trajectory. On the one hand, the Fed is still committed to fighting inflation. Investors will only begin to price in a shift in Fed policy when the trade-off between the two becomes more balanced. Before that, we first need to see a global recession with a deflationary effect, but we are not there yet. "

　　On the other hand, he said, macroeconomic fundamentals also continue to support the dollar's strength relative to other major currencies, such as the euro and the pound, both of which are under extreme pressure.

"Besides the interest rate differential factor, the other main reason for the dollar's appreciation so far this year is the improvement in the U.S. terms of trade due to rising energy prices; conversely, the trade situation between the United Kingdom and Europe has deteriorated significantly. , the next stage of the dollar's appreciation may be more driven by a further increase in risk aversion, and investors may see the dollar as the only safe haven amid global market turmoil.

"The dollar index could hit its July 2001 high of 121 later this year if global risk aversion continues to rise."

　　Strong dollar leads to volatility in foreign exchange and global markets

　　Every strong dollar in history has caused turmoil in foreign exchange and global capital markets.

Recently, the pound fell to the lowest point in history against the dollar. The intervention of the Bank of Japan was still difficult to help the yen to break away from the 24-year low against the dollar, and the euro fell further below parity with the dollar.

With the exception of these major currencies, which have fallen the most, every G10 currency has fallen against the dollar this year, with an average drop of about 16%.

　　Currency market volatility also continued to rise.

Last week, Deutsche Bank's Currency Volatility Index jumped to a 2-1/2-year high of 13.55.

The index measures the historical volatility of major G7 currencies.

Analysts expect currency market volatility to continue.

　　Bipan Rai, head of FX strategy for North America at CIBC Capital Markets, said: “There is indeed a basis for more disorderly action in FX markets right now. While FX traders are no strangers to volatility, the confluence of risks has made this volatility a reality. “This round of FX volatility is different from March 2020, when policymakers were united and their responses to the outbreak were broadly similar. Now, traders are facing global central banks dealing with a spike in inflation,” he added. and react differently when the currency weakens.”

　　Chris Huddleston, chief executive of FXD Capital, said: “In the past, currency volatility was a macroeconomic story, but this time around it is very much a central bank story, with central banks around the world scrambling to raise interest rates. "

　　Not only the foreign exchange market, but the strong dollar has also led to more turbulence in the global capital market.

　　Jim Caron, portfolio manager and chief fixed-income strategist of Morgan Stanley Investment Management's global fixed-income team, told Yicai that the sharp rise in interest rates by the Federal Reserve and the accompanying strong dollar have constituted a global risk situation. .

　　He said that because the Federal Reserve is the world's largest central bank and the U.S. dollar is the main reserve currency, the Fed's policy has a great impact on global monetary policy.

“The U.S. dollar as the main reserve currency means that the U.S. dollar has the highest proportion of foreign exchange reserves of other central banks around the world to offset U.S. dollar debt. In other words, global central banks need to have sufficient U.S. dollar reserves to deal with stress. These U.S. dollar reserves are mainly Invest in U.S. Treasuries to earn income," Cullen said. "As the Fed raises rates, the dollar strengthens, which means that foreign currencies weaken relative to the dollar. As a country's currency depreciates, it increases inflation, which will prompt the local central bank to raise interest rates to counter the dollar. Strong, to suppress high inflation. Alternatively, countries can intervene in currency markets by buying their own currency, but only with dollars to repurchase. To raise dollars, countries can sell U.S. Treasuries, thereby pushing up U.S. Treasury yields.”

　　Combining the above reasons, and because high U.S. bond yields and a strong dollar are very negative for global growth, he said that eventually rising interest rates and monetary policy will form a vicious circle, and many foreign debts are denominated in dollars, which will lead to the shrinking of the U.S. Treasury yield advantage. narrow.

Japan's previous intervention in the yen has caused heated discussions, and if similar interventions become more common, the market needs to take it seriously.

　　A Morgan Stanley report last week also pointed out that the continued strength of the dollar bodes poorly for global financial markets, “Historically, a strong dollar has usually led to some kind of financial/economic crisis. Beware that some part of the global market is collapsing, that moment is now.”

　　Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, said that at present, with the appreciation of the dollar leading to exchange rate fluctuations and rising dollar funding costs in emerging markets, global financial conditions have There is tightening and so-called "dollar warriors" (foreign central banks fighting back against a strong dollar) are increasing.

This process, according to Emmons, often involves investors selling U.S. stocks and U.S. debt, creating a "cash is king" situation.

　　In addition to affecting global capital markets, Sigari told Yicai that a stronger dollar usually has a negative impact on the global economy, especially for emerging markets, where most of the debt is denominated in dollars.

Furthermore, with Europe currently appearing to be the epicenter of the global energy and inflation crisis, and commodities mostly denominated in U.S. dollars, the impact of this round of dollar strength will continue to weigh heavily on European countries.

And a weaker pound or euro won't boost exports much at a time when the global economy is slowing.

As a result, trade fundamentals in Europe and the UK are expected to continue to deteriorate in the face of higher energy prices and a stronger dollar.

　　Will there be a new round of "Plaza Accord"?

　　Nonetheless, so far, both analysts and the United States have dismissed the possibility of a joint intervention like the 1985 Plaza Accord.

The Plaza Accord was signed in 1985 by the finance ministers of the United States, the United Kingdom, Germany, France, and Japan at the Plaza Hotel in New York in the United States, ending the dollar against other major currencies in the first half of the 1980s through joint currency intervention. continued appreciation.

In the decade following the Plaza Accord, the dollar has been falling.

　　A report from the Morgan Stanley strategy team last Thursday said: “In this day and age, joint FX intervention is difficult, so we don’t see a new Plaza Accord anytime soon. Even back then, discussions around currency coordination were It started as early as 1982, and it took three years to prepare for the Plaza Accord.” Moreover, the team added that even if a new round of joint intervention does occur, under current conditions, it is difficult to cause the dollar to continue to weaken.

Because, unlike back then, America needs a strong dollar right now.

A weaker dollar would undermine the Fed's goal of low inflation, as "a weaker dollar is effectively an inflationary factor in the U.S. as well as a deflationary factor abroad."

In that year, the United States' fiscal deficit increased sharply, and the foreign trade deficit increased substantially, which made the United States hope to improve the export competitiveness of its products through the devaluation of the dollar, so as to improve the United States' trade deficit.

　　Emmons also believes that a formal joint intervention in the dollar is unlikely and that countries may take another form of action, namely "central banks to say more about a strong dollar."

　　Mark Sobel, the U.S. chairman of OMFIF, a London-based financial think tank, said: “Joint interventions are usually only aimed at the worst crises in recent years, and if global markets develop further into extreme chaos and volatility, we may be able to find joint interventions. Exchange rate rationale. But at the moment, monetary policy divergence across countries greatly reduces the chances of a successful joint intervention, which is 'spitting on the wind' in this context."

　　Most importantly, the recent turmoil in the United Kingdom and Japan is not enough to make the United States willing to intervene jointly.

The U.S. Treasury has so far not expressed concern about recent market volatility.

U.S. Treasury Secretary Janet Yellen told foreign media last week that markets were functioning well and that she did not see liquidity issues that could pose financial stability risks.

When asked last week whether the G7 might emulate the 1985 Plaza Accord to prevent the dollar from rising strongly, White House chief economic adviser Brian Deese said bluntly, "This is not the direction we expected."