The U.S. Dollar Index is a measure of the ratio of the U.S. dollar to other major currencies and reflects the international purchasing power of the U.S. dollar. The higher the U.S. Dollar Index, the stronger the U.S. dollar and the ability to buy more goods for less. The lower the dollar index, the weaker the dollar and the more dollars are needed to buy the same commodity.
Recently, it has been said that the dollar index has fallen sharply, signaling the collapse of the dollar. They were referring to February 9 and February 12, when the dollar index fell by 004% and 096% at 104111 and 103115, a new recent low.
However, if we look at a longer period of time, the volatility of the dollar index is not so striking.
Since the beginning of 2022, the US dollar index has experienced a process of big ups and downs. At the beginning of 2022, the dollar index hovered around 95, showing the weakness of the dollar. This is because since 2020, the Federal Reserve has significantly increased its currency** in response to the pandemic crisis, which has led to the depreciation of the US dollar. At the same time, the United States** has also adopted a high fiscal stimulus, issuing a large number of Treasury bonds, further eroding the credibility of the dollar.
At the beginning of 2022, the U.S. dollar index started to ** as the market anticipated an imminent rate hike by the Federal Reserve. In April 2022, the Federal Reserve officially announced a rate hike, and the dollar index soared with it, reaching a peak of 114 in October 2022, the highest level in recent years. This suggests that the US dollar's interest rate hike has increased the attractiveness of the US dollar and strengthened its value.
However, the high level of the dollar index did not last long, and from October 2022, the dollar index entered a downward channel, falling all the way to around 104 today. During this period, the U.S. dollar index has fallen below the 100 mark many times, and even fell to 99 in July 20235, close to the level before the April 2022 rate hike.
In recent days, the dollar index has appeared again, and it is possible to fall back to the level before the rate hike again, which makes one wonder how effective the dollar rate hike really is?
Why did the dollar index go on the contrary after the US interest rate hike? Could it be that the US dollar rate hike did not bring a strong dollar, but a weak dollar?
To answer this question, we must first understand what impact does the rise and fall of the dollar index have on the US economy?
The U.S. dollar index is good for the U.S. economy, because the U.S. is a big importer and a big consumer, and the appreciation of the U.S. dollar can reduce the value of imported goods and increase the purchasing power of Americans. The dollar index** is bad for the U.S. economy, because the U.S. is not a big exporter, nor is it a big producer, and the depreciation of the dollar will increase the ** of imported goods and reduce the purchasing power of Americans.
Therefore, the purpose of the Fed's interest rate hike is to enhance the value of the dollar, prevent excessive depreciation of the dollar, and maintain the international status of the dollar.
However, raising the US dollar rate is not a simple matter, and it also has a lot of *** and may even backfire.
We need to know that money is also a commodity, and its ** is also affected by supply and demand. The cost of money is the interest rate. The higher the interest rate, the higher the cost of the currency, the lower the demand for the currency, and the lower the ** of the currency.
As a world currency, the US dollar must meet two conditions if it wants to maintain its liquidity and credibility, the first is free convertibility, and the second is low interest rates.
Free convertibility means that the dollar can circulate freely around the world, but it also means that Americans have no complete control over where the dollar goes. Low interest rates mean that the cost of the dollar is low, but it also means that raising interest rates increases the cost of the dollar and harms the liquidity of the dollar.
Therefore, although the US dollar interest rate hike can increase the value of the US dollar, it will also reduce the demand for the US dollar and reduce the liquidity of the US dollar.
At the same time, in order to avoid the US dollar raising interest rates too quickly and too violently, triggering a recession in the US economy, the United States has taken some measures, such as increasing the fiscal deficit, issuing more Treasury bonds, and releasing water to US companies and residents.
Although these measures can ease the pressure on the US economy, they will also weaken the credibility of the US dollar, let the world see clearly the capital nature of the United States, cause confrontation between the US dollar and the world, and hurt the credibility of the US dollar.
To sum up, this round of US interest rate hikes, although at the beginning of the US dollar index, but later the effect became worse and worse, and the US dollar index gradually**, almost back to the level before the rate hike.
This shows that the Americans no longer attach importance to the dollar's status as a world currency, and the world no longer gives face to the United States. Since last year, the global trend of de-dollarization has been obvious, the position of the dollar has been seriously impacted, and the strength of the dollar has become unsustainable.
Therefore, some experts believe that now the Fed does not dare to cut interest rates easily, because once the interest rate is cut, the dollar index may be sharply **, and the glory of the dollar will no longer exist.
In this way, the dollar is facing an unfathomable precipice. Is the Fed going to take a step forward, or is it going to stay put? It's a tough choice.
Cutting interest rates on the dollar has become a very dangerous thing, and how the United States and the Fed decide is probably a problem of the century.