General

The U.S. dollar index pulled back slightly from a 20-year high on the 19th, but it is still running at a high level. Affected by the strong dollar, the inflation situation and financial market stability of many countries are facing increasingly severe tests, and they have increased intervention measures to curb the sharp depreciation of their currencies.

Multinational increase intervention measures

The US dollar index fell slightly from a 20-year high on the 19th, but it is still at a stage high of 107. In order to prevent the exchange rate turbulence caused by the strong dollar, many countries have increased the intensity of intervention measures.

According to Vietnam’s news on the 18th, the country’s agency VDSC estimated that the Central Bank of Vietnam has sold about 13 billion US dollars to the market this year, aiming to maintain the stability of the local currency exchange rate. This amount is equivalent to 11% of Vietnam's total foreign exchange reserves. Affected by this, the Vietnamese Dong has become a better performing currency this year, with a decline of about 2% against the US dollar this year. VDSC expects that the central bank of Vietnam will continue to put US dollars in the open market to ease the exchange rate pressure caused by the strong US dollar.

Chile's central bank announced a $25 billion foreign exchange intervention program last week after the Chilean peso plunged 15 percent against the dollar over the past month. The central bank has raised interest rates several times before, failing to stop the trend of currency depreciation.

In order to prevent capital outflows and the sharp depreciation of the local currency exchange rate under the impact of the strong dollar, the Reserve Bank of India has relaxed the bond market regulations for foreign securities investors and allowed commercial banks to increase the interest rate of non-resident foreign exchange deposits. The Indian rupee has fallen more than 6 percent since the start of 2022, according to FactSet.

The currencies of emerging economies such as Indonesia, Thailand and Malaysia have also been hit hard recently. Indonesia's central bank pledged to keep a close eye on the devaluation of its currency. Goldman Sachs Group expects Indonesia's central bank to start a tightening cycle in August, with a cumulative rate hike of 1.25 percentage points this year.

The Wall Street Journal reported that the U.S. dollar index, which measures the U.S. dollar against a basket of currencies, has risen more than 10 percent so far in 2022. In the face of stubborn inflation and rising odds of a global recession, with the Federal Reserve determined to continue to tighten interest rates, investors may be holding on to the dollar for a long time to come. Many central banks in Asia are on a narrow path between interest rates, inflation and capital outflows, with a real respite only after the end of the Fed's tightening cycle.

Increased market vulnerability

The impact of the strong dollar has wide-ranging impacts, and many countries face increasingly fragile market risks such as capital outflows and debt risks.

Wells Fargo recently counted the performance of about 19 emerging economies. After measuring current account balances, interest rate differentials with the United States, foreign exchange reserves and other factors, it found that the currencies of Turkey, Poland, Chile, Colombia, Argentina, Russia and South Africa were "very high". Vulnerable"; about 10 other countries are classified as "moderately vulnerable", but China and Israel currently have no currency risk.

The bank's economist McKenna bluntly said: "The depreciation of emerging market currencies is more severe than expected, and this pressure is more likely to continue." He also pointed out that the Turkish lira and the Polish zloty are most likely to be sold off sharply. , the latter may depreciate by 20% during the recession.

According to the monitoring data of the Institute of International Finance, in the past three months, capital outflows from emerging markets and developing economies excluding China were at the highest level in the past 12 years. JPMorgan data also showed that as of July 10, investors had withdrawn about $52 billion from emerging-market bond funds, the most in 17 years.

The industry generally believes that what is worse than currency devaluation is the risk of large-scale debt. The strong dollar has triggered a surge in the cost of foreign debt in many countries, and economies with high debt and low incomes will face a "credit crisis". The debt-servicing burden of middle-income developing countries is at its highest level in 30 years, according to the International Monetary Fund. Among the nearly 100 emerging market and developing economies, about 10% have fallen into debt repayment crisis, and 50% are facing severe debt difficulties. Debt defaults, rating downgrades, and investment slowdowns in emerging economies will significantly slow down the pace of global economic recovery, further increasing risks and uncertainties.

The strengthening of the U.S. dollar has increased the pressure of imported inflation in various countries, and the risks are also being transmitted to the fiscal and national debt areas. "Nihon Keizai Shimbun" reported that the global bond value is plummeting. From January to June 2022, bond values fell by $17 trillion, the largest decline dating back to 1990. In terms of national debt, it was reported that interest rates on national debt in southern European countries continued to rise. The winning interest rate for the 10-year government bond issued by the Italian government at the end of June was 3.47%, an eight-year high. Tomoyuki Ota, chief economist at Mizuho Research & Technology, said, "Due to rising energy and food prices and increasing pressure on fiscal policy to support household income and expenditure, the finances of southern European and emerging market countries are at great risk."

triggering a vicious cycle

Worries about global economic growth have pushed the dollar to record levels. The continued strength of the US dollar increases the risk of the world entering a "vicious circle".

Turek, founder of JST Consulting, pointed out that in the context of higher-than-expected inflation and commodity prices still at high levels, the frenzy of interest rate hikes triggered by the United States cannot end in a short period of time, and the dollar may continue to rise. People are worried that the dollar is falling into an unprecedented situation.” vicious circle". Countries are increasingly concerned about the sharp depreciation of their currencies. Taking the euro zone economy as an example, the continuous strengthening of the dollar has brought imported inflation pressure to it. The European Central Bank hopes to reduce the cost of imported goods including energy by raising interest rates, but it will bring more pressure to the euro zone countries with high debt levels. It's easy to fall into a vicious circle under great pressure.

Economists at the International Monetary Fund and the Bank for International Settlements believe that the dollar, which dominates global trade, could tighten global financial conditions and deal a blow to real investment.

Standard Chartered Bank is basically neutral on the dollar, bearish on the performance of the dollar in the next 6 to 12 months, and expects the dollar to peak in the second half of the year. Central banks around the world have followed the Fed's lead in tightening monetary policy, aiming to avoid a sharp weakening of the currency and a further rise in inflation - which will ultimately weigh on the dollar. But in the short term, the Fed may still adopt an aggressive rate hike stance, while geopolitical risks may increase the demand for the dollar as a safe-haven asset.