Despite the fact that US Treasury yields have been soaring in recent months, the US dollar has found its footing and is poised to extend its gains. While the gains can be seen as a sign of the strength of the US economy, the repercussions can be quite negative if the dollar loses its momentum and starts to fall.
US dollar gains against non-China emerging markets
During the past year, the US dollar has gained against non-China emerging market currencies. This has been a very large macroeconomic impact for all countries. However, the dollar’s strength is especially acute in emerging markets. This is because the emerging market economies are reliant on imported goods more than their advanced counterparts. They also have large amounts of US dollar-denominated debt.
The US dollar has also benefited from the hawkish monetary policy stance of the Federal Reserve. The Fed has aggressively hiked rates, pushing up inflation. This is good news for consumers, but bad news for American exporters. In addition to driving up the price of imported food and medicine, the strong dollar is also pushing up the cost of imported fuel.
The stronger dollar also makes it more attractive to investors. The dollar is a safe haven, and investors are hesitant to risk their capital in riskier assets. The dollar has also gained against most major currencies this year.
US dollar gains against the Chinese yuan
Several factors have contributed to the US dollar gains against the Chinese yuan. A major reason is the growing unrest in China. In addition, a wave of civil disobedience has dented investors’ appetite for risk. Another factor is a slowing of Chinese economic growth.
Some analysts argue that the Chinese yuan is still significantly undervalued. However, others argue that it is not as undervalued as it once was.
The yuan has been weakening against the dollar since mid-August. Currently, the yuan fluctuates within a range of 6.2 to 7.2 against the dollar. The latest decline is the yuan’s weakest since the 2008 global financial crisis.
China has announced 19 policy measures to shore up its economy. These measures include a pledge to allow the yuan to float by a maximum of 0.75 percent.
The People’s Bank of China announced plans to cut foreign exchange reserve requirements. As a result, Chinese banks were seen selling dollars.
US dollar gains against the G3
Despite the US Federal Reserve’s recent aggressive rate hikes, the dollar has gained ground against the G3 currencies. This is not surprising, since the dollar acts as a safe haven during times of market stress. The US Dollar has also been supported by a strong March non-farm payrolls report.
The US dollar has also benefited from the proliferation of new regulations on Russia. These new measures could include restrictions on billions of dollars in energy imports.
The US Federal Reserve’s re-launch of its quantitative easing program is also causing investors to focus on the US Dollar. In the first two months of this year, Asia ex-Japan G3 currency bond issuance volume was 8.3% higher than last year.
The European Central Bank (ECB) is also waking up to its need for inflation. In fact, the re-launch of its quantitative easing programme was initially announced as a $700 billion program.
The US dollar has gained ground against the G3 currencies, although the euro has also been hit by the deflationary impact of the Eurozone.
China’s upside and downside risks
Despite China’s growing economic prowess, there are still critical weaknesses that could derail the Chinese economy. For instance, China’s debt-ridden financial system and social inequality are still a concern. In addition, China’s economy is still vulnerable to risks in the global economic landscape.
China is a world leader in manufacturing and trade. In the near future, it is expected to overtake the United States as the world’s largest economy. However, China’s economic growth is expected to slow as it repairs its ties with the West. This could lead to more social and political tensions inside China.
The country must also rekindle its productivity growth, which is declining, and tackle social inequality. It must also encourage a shift towards consumption and innovation. If this is not accomplished, China could find itself stuck in the same old growth path that has not worked for it in the past. Fortunately, China’s centralized Leninist system has helped address some of these problems.
