Title: Concerns Rise as US Dollar Index Falls Below 100; Speculations Arise on the End of Fed’s Interest Rate Hike
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On July 14, the US dollar index dropped below the key threshold of 100 for the first time since April 2022. Experts attribute this decline to the easing inflation in the United States, sparking discussions about the Federal Reserve’s upcoming interest rate decision in late July. As the US dollar weakens, the pressure on the renminbi’s depreciation recedes, leading to recent rebounds in both onshore and offshore renminbi exchange rates.
Data reveals that the year-on-year growth rate of US Producer Price Index (PPI) in June decreased to 0.1% from the previous month’s 1.1%, falling short of the expected 0.4%. This is the lowest growth rate since August 2020. Additionally, the Consumer Price Index (CPI) increased by 3% year-on-year in June, marking the smallest increase since March 2021.
Deng Zhichao, secretary-general of Zhixin Investment Research Institute, explained that three major factors influence the US dollar index. Firstly, the Federal Reserve’s monetary policy plays a crucial role. Given the unexpected drop in CPI, particularly with regards to core CPI, the Fed’s motivation to raise interest rates diminishes. As a result, the current round of rate hikes is reaching its conclusion, leading to downward pressure on the US dollar index.
Secondly, economists predict a mild economic downturn in the United States from the fourth quarter of this year to the first half of next year. This weakening of the US economy further undermines the fundamentals of the US dollar index.
Lastly, the monetary policies and economic performances of other developed economies, such as Europe, impact the US dollar index. Expectations of stronger interest rate hikes in Europe in the latter half of the year restrain the US dollar index. However, the weaker economic operation in developed economies like Europe provides some support to the US dollar index.
Based on a comprehensive analysis, experts anticipate a weakening trend for the US dollar index in the second half of the year, with periodic fluctuations. The upcoming Federal Reserve interest rate meeting later this month will be crucial in determining the future trajectory of the US dollar.
According to Deng Zhichao, June saw core inflation in the US drop by 0.4% compared to May, marking the first time in 20 months that core inflation fell below 5%. This suggests that core inflation may exit the “sticky” range. Consequently, the Fed’s focus will shift from combating inflation to stabilizing the economy and averting risks. While Fed officials may still endorse interest rate hikes due to core inflation remaining above the target of 2%, the extent of rate increases will likely be limited.
Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, claims that the market may have underestimated the possibility of the Fed raising interest rates twice. He argues that US employment and inflation trends support the potential for subsequent dollar appreciation. With the current unemployment rate at 3.6% and non-agricultural employment consistently surpassing expectations, the foundation remains stable. Furthermore, as the base effect weakens and inflation is expected to remain above the target of 2% by year-end, the Fed may still raise interest rates in September.
A weaker US dollar benefits non-US currencies. From July 6 to 13, the US dollar index declined by nearly 3.5%. Meanwhile, the Chinese renminbi’s central parity rate has appreciated for six consecutive trading days, signaling an optimistic outlook. The US dollar’s interest rate hike cycle approaching its conclusion, a weakened US economic outlook, and the European Central Bank’s move towards restrictive interest rates will collectively restrict the future upside potential of the US dollar. As the Chinese economy demonstrates steady recovery and improved international balance of payments, the renminbi’s flexibility has significantly increased.
Li Jianjie, a senior investment advisor at Jufeng Investment Consulting, believes that the end of the Fed’s interest rate hike and the projected inflection point of US dollar strength bode well for the renminbi. The renminbi’s exchange rate against the US dollar has been persistently rising, and further appreciation is expected, potentially reaching the 7.10 or even 7.00 mark. Northbound funds, which are sensitive to exchange rates, are likely to flow back into A shares as the renminbi continues to appreciate. This provides an opportunity for northbound funds to purchase undervalued high-quality assets while also benefiting from exchange rate gains.
In conclusion, as the US dollar index falls below 100, speculation arises regarding the end of the Federal Reserve’s interest rate hike. The recent easing of inflation in the United States and predictions of a mild economic downturn contribute to the weakening US dollar. However, conflicting factors such as potential interest rate increases and positive employment trends may influence the dollar’s future trajectory. As the renminbi strengthens, China’s economy recovers, and the fundamentals of the international balance of payments stabilize, experts predict a positive outlook for the renminbi’s future performance.