Rate Cuts: Dollar Shorting Opportunity, Forecast -40%
Under extreme trade protectionism, the industrial structure of the United States has not seen significant adjustments. Even with the Federal Reserve raising interest rates to 5.25%, the influx of global funds into the United States has not brought prosperity to American manufacturing; instead, it continues to create an indestructible myth on Wall Street and in the U.S. stock market.
I suppose this outcome is quite contrary to the original intention of the Federal Reserve's interest rate hikes aimed at repatriating money to the U.S., right?
The Federal Reserve's rate hikes are, to some extent, meant to maintain the dollar's hegemony globally. However, since the Fed paused rate hikes in 2022, the dollar index has fallen from 114.79 to a current low of 100.53, a decline of over 11%.
If the Fed begins to cut rates in September, it would spell disaster for the dollar, with the possibility that the dollar index could drop below 70. The decline of the dollar index might exceed 40%.
In such an extreme situation, one cannot dismiss the possibility that the desperate U.S. might once again stir global affairs with its military strength. Could the Cold War between China and the U.S. actually turn hot?
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Rate cuts present the best opportunity to short the U.S. dollar
According to observations by Citibank, hedge funds are currently using the dollar for a new round of arbitrage trading.
What’s different now is that these hedge funds are shorting the dollar while going long on the euro, yen, and renminbi.
Currently, in the foreign exchange market, the yen has appreciated against the dollar to around 144, and the pound has risen to about 1.3 against the dollar, with the euro reaching a high of around 1.12.
The appreciation ranges from 5% to 10%.
In addition to the pressure of dollar depreciation, the risk of a burst in the U.S. stock market's AI bubble is also looming.
Since Powell stated that the window for changing monetary policy has opened, the Nasdaq index has not only failed to rise but has also declined, with investors viewing this policy shift not as a substantial benefit but as a meaningful drawback.
After all, would the U.S. cut rates if the economy were not truly facing recession risks?
For Wall Street, a rate cut does not signal an advantage; this pattern is quite discernible.
Thus, Wall Street, with its historical experience and muscle memory, reacts to news of the Fed cutting rates by immediately shorting dollar assets.
After a rate cut, the outflow of dollars becomes a critical issue the U.S. must tackle. How to prevent the outflow of dollars from severely impacting the American economy is a concern the U.S. has to reckon with at this stage; for America, the available choices seem limited to either a cold war or a hot war.
The new cold war initiated by the U.S.
Since the onset of Trump's trade war against China in 2018, the world has entered a new cold war structure.
Whether or not those Western politicians who speak of "freedom and democracy" acknowledge it, this cold war structure has been in place for nearly six years.
The cold war was sparked by changes in the global economic landscape, which are extremely unfavorable for the United States.
When the Bretton Woods system was first established, it coincided with America’s robust industrial power, which allowed for a large-scale export of industrial products globally.
In other words, whoever possesses a strong industrial foundation and can market a diverse range of industrial products on a global scale gains the right to issue currency.
However, the oil crisis of 1973 precipitated the collapse of the Bretton Woods system, leading to soaring oil prices and a currency disconnect that plunged European and American nations into serious inflation.
In such a harsh economic climate, even if ten Keynesians emerged in the U.S., it would be challenging to resolve the supply-demand imbalance.
In 2018, Trump, the instigator of the trade war, condemned during a speech: “Our workers created the American miracle but were ruthlessly betrayed. Politicians were keen to promote globalization, moving our jobs, wealth, and factories overseas.
Those financial giants who generously funded politicians profited immensely during the globalization wave, myself included.”
Once the dollar loses the support of industrialization, it becomes a dilemma for America itself.
The excessive issuance of currency is bound to trigger inflation within the U.S. as countries around the world no longer require large quantities of dollars; purchasing goods is not solely reliant on the dollar; the renminbi is also a viable alternative.
Today, the free market has transformed from a mere economic theory into an ideology, a religious belief, or something akin to fundamentalism.
The American free market has morphed into a barrier of trade protectionism and a stout iron wall obstructing the rise of other nations.
Since the Biden administration took office, the new government has continued the China policy established during the Trump era, and to this day, the bridges between China and the U.S. remain in a semi-disrupted state.
Although nations globally do not acknowledge the current cold war mentality in the U.S., the pattern of the cold war has already emerged.
In the future, will global economic and trade relations ease between China and the U.S. due to rate cuts? Or will the cold war structure intensify?
Could the cold war become a hot war?
A few years ago, when relations with China were entering a turning point, many believed that both countries could sit down together to discuss issues, make some concessions, and once relations eased, business would proceed as usual, with profits still in play.
However, from today’s perspective, the conflicting interests between China and the U.S. are growing increasingly pronounced.
The internationalization of the renminbi has tangibly impacted American interests; the ongoing provocations surrounding Taiwan from the U.S. continually test China’s bottom line.
In the future, if one day sparks a conflict, the chances of turning into a hot war are small, but the possibility remains.
The U.S. has already initiated investigations into China's military preparations and even adjusted its deterrence strategy towards China in Washington. This is a preparation for a probability that, while quite low, could arise in the future.
Therefore, in the context of deglobalization, the decoupling between the two countries has actually evolved into a cold war mentality,
America must ensure the stability and dominance of the dollar rather than shoulder responsibility for the global economy.
This status quo is challenging to maintain long-term; like in the 1990s, had the Soviet Union not collapsed suddenly, the cold war between the U.S. and the Soviet Union would have inevitably escalated into a hot war.
This historical parallel offers meaningful insights for contemporary China.
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