The Federal Reserve has raised interest rates again!

However, the United States may feel very disappointed because, after the rate hike, not only did they not see the appreciation of the US dollar, but the dollar has continued to fall.

The United States reluctantly admits that it really can't cut anymore.

Entering 2023, the yuan has completely ignored the interest rate hikes of the US dollar and has risen strongly by more than 2000 points.

Just before dawn today, after the Federal Reserve announced the rate hike, the exchange rate of the yuan further increased, approaching a breakthrough of 6.70 at its highest.

Advertisement

01, Harvesting Routine

The US dollar forcibly raises the US dollar index through interest rate hikes, which has been an almost unbeatable move in the past few decades. And for most of 2022, this move was also proven to be very effective.

After suppressing the exchange rates of other currencies, the purchasing power of the US dollar is higher, making it more convenient to harvest.

Taking the exchange rate of the yuan as an example.

As can be seen from the chart above, at the beginning of 2022, before the US dollar interest rate hike, the offshore exchange rate of the yuan against the US dollar was calm. Although the US dollar index had previously risen from below 90 to above 95, the yuan exchange rate actually increased to some extent.In March 2022, the US dollar experienced its first interest rate hike of 25 basis points, officially marking the beginning of an interest rate hiking cycle. It was also after this that the exchange rate of the Chinese yuan against the US dollar began a rapid decline in late April.

In early May, the US dollar was raised by interest rates again by 50 basis points, and the Chinese yuan continued to fall until mid-May.

For a period thereafter, the exchange rate of the Chinese yuan remained relatively stable.

However, after the Federal Reserve consecutively raised interest rates by 150 basis points in June and July, the exchange rate of the Chinese yuan started a decline that lasted for two and a half months in mid-August.

During this period, the Federal Reserve also raised interest rates by another 75 basis points in September.

At that time, it seemed that the Federal Reserve's interest rate hikes to increase the US dollar index and suppress the exchange rates of other currencies was an effective strategy. Perhaps the American financial capitalists at that time believed that with a few more interest rate hikes, the harvest could proceed smoothly.

02, Finally, It's No Longer Possible to Harvest

However, the United States was mistaken; the harvest had not yet begun, and the Chinese yuan had already shown a reversal.

The turning point occurred in November, when the Chinese yuan surged by more than 2900 points in November of last year, followed by another increase of over 1250 points in December.

At that time, it was already apparent that the US dollar's method of using interest rate hikes to boost the US dollar index and suppress the exchange rates of other currencies was no longer viable.However, it is quite evident that the United States is not yet willing to accept the situation, and it raised interest rates by another 25 basis points at the beginning of February this year.

In fact, this 25 basis point interest rate hike was anticipated, and for over a month prior, the market had already foreseen this increase. Nevertheless, even with the knowledge that the Federal Reserve would still raise interest rates by 25 basis points, the Chinese yuan continued to rise regardless.

At the end of the previous year, the closing rate of the yuan was 6.92, but now, after a month has passed, the latest exchange rate has approached breaking through 6.70, with the maximum increase exceeding 2,200 points.

From the chart above, we can observe two waves of appreciation in the Chinese yuan exchange rate in 2023.

The previous wave of appreciation had already anticipated the interest rate hike of the US dollar, yet it still broke through 6.7 strongly.

In the following days, as the Federal Reserve meeting drew nearer, the exchange rate rebounded instead, including in the early morning when the Federal Reserve announced the interest rate hike, the yuan even reached its highest at 6.7059.

03, The US dollar is struggling

In contrast, the US Dollar Index has been continuously falling. At its highest last year, the index had surpassed 114, but now it has experienced a decline for several consecutive months.

Looking at the monthly trend, from October of last year to January of this year, there was a continuous four-month decline, and after the interest rate hike in early February, the US Dollar Index further fell to 100, and it is estimated that it will soon break through the 100 mark, returning to the 90 range.

Now it is the United States' turn to face greater troubles.Inflation remains high, necessitating further interest rate hikes, but continuing to raise rates could potentially push the economy into recession. This is the first dilemma with a catch-22 situation.

Additionally, regardless of whether interest rates are increased or not, the US dollar is on a downward trend. It can be imagined that if the rate hikes are halted, the decline in the US dollar index will accelerate.

Thus, the second trouble arises: as the US dollar continues to depreciate, capital will keep flowing out, inevitably leading to an immeasurable massive sell-off in the US capital markets.

It appears that the United States is inevitably going to suffer a backlash.