Since the second quarter of this year, as inflation in the United States remains high, the Federal Reserve has adopted aggressive tightening policies to "outperform the market" and prevent inflation from becoming "entrenched." Researchers at ANBOUND have previously pointed out that such policy could potentially bring the U.S. into the prospect of recession. It will not only promote the appreciation of the dollar but also have a huge impact on the global economy and international financial market structure. As we enter the second half of the year, after a series of U.S. economic and employment data have been released, the market further confirmed the strong potential of U.S. economic growth and clarified the Fed's future tightening policy expectations. This, in turn, has accelerated the trend of dollar appreciation, while aggravating the turmoil in the global economy and financial markets, dragging the world into the quagmire of stagflation.

Now, the U.S. dollar index has exceeded 107 and further rose above 108 on July 12, and the yield on the 10-year U.S. Treasury bond has risen to above 3%. The U.S. dollar index has risen more than 11% since the beginning of the year and has accumulatively increased 20% since its low in May last year. The sharp rise of the dollar in July was mainly due to the fact that the fundamental situation of the U.S. economy was supported by the data. Recently, the U.S. non-farm payroll data released by the Department of Labor showed that the American labor market remains strong. At the same time, the upcoming CPI data for June is expected to rise further. This means that demand in the U.S. economy remains rather strong, and it also strengthens the market's expectations for the Fed to tighten policy. The continued appreciation of the dollar exchange rate is also the result of these policy changes and market expectations.

The continuous rise of the dollar index has brought both advantages and disadvantages for the United States itself. On the upside, a strong dollar will not only beckon dollar capital back to the U.S. market from the rest of the world, but also bring down the prices of energy and commodities denominated in the currency. At the same time, the price of imported goods in the U.S. will also decline, which will alleviate the current short-term inflationary pressure in the country to a certain extent. As the Wall Street Journal said, “there is a reverse currency war, and America is winning”. This means that the Fed uses the advantage of the dollar as a global currency to accelerate the effect of the American policy to curb inflation.

The downside, though, is that the U.S. economy will inevitably take a hit in the event of higher interest rates. The U.S. stock and bond markets are all facing adjustments in asset valuations. The yield on U.S. Treasury bonds has been rising, and its stock market has also been adjusting downwards this year. Currently, the Nasdaq has fallen by more than 33% from its previous peak, the S&P 500 has fallen by nearly 24%, and the Dow has fallen accumulatively by nearly 20% from its peak at the beginning of the year. The U.S. stock market has become a "bear market". The adjustment of the stock market will indirectly affect the overall demand and will be detrimental to American economic growth. More importantly, under the Fed's tightening policy, whether the U.S. economy can achieve a soft landing is another worrying issue. Many market institutions expect the Fed to raise interest rates and shrink its balance sheet regardless of the consequences, which will drag down the prospect of stagflation in the American economy and finance.

In the face of the challenge of high global inflation, a strong dollar also poses a threat not only to developed economies such as Europe and Japan, but also to emerging market countries. Although the appreciation of the U.S. dollar is beneficial to countries’ exports to the dollar, under the circumstance that the global supply chain is distorted and the demand in the U.S. is weakening, relying solely on exports may make it difficult for countries to support their own economic recovery. Considering the Russia-Ukraine conflict and the distortion of energy supply under intensified international geopolitical risks, the devaluation of local currencies means that countries need to face the risk of imported high inflation, which will further devour the wealth of residents and exacerbate income inequality. All these will impact the economy of various countries.

Presently, the depreciation of the euro and the yen against the dollar has reached historical lows. The euro has fallen below parity against the dollar, having lost 5% of its value since June. The yen has led the G7 countries with a 15% depreciation this year, and is likely to exceed 140 yen to the dollar. Issues such as inflation, weakening economy, fragmentation, and political instability that the UK is currently facing are still dragging the pound to move forward. The Korean won, the Thai baht, and the Philippine peso also all show the trend of significant depreciation. Under the high inflation, the continued deterioration of the economic situation of major economies will further intensify with the strengthening of the dollar.

For China, the yuan has already experienced a round of depreciation before May, and it has also shown a weakening trend recently amid the sharp strengthening of the dollar. Nonetheless, as the overall economy of China is still relatively stable, there has not yet been a large outflow of international capital. However, China is also facing various issues like the adjustment of the global industrial chain, the transfer of some production capacity out of the country, the intensification of competition in labor-intensive industries in Southeast Asia, and the increase in labor costs, etc. Under the effects of internal and external factors, its external market competitiveness is also facing long-term threats. With the continuous appreciation of the dollar and the widening policy differences between China and the United States, the Chinese capital market is facing increasing external shocks as well. Coping with the impact of the appreciation of the dollar and the interest rate hike of the Fed is also becoming increasingly crucial for China's economic and social stability. For this very reason, ANBOUND has repeatedly emphasized the need for China to stabilize its economy.

ANBOUND’s research team has previously pointed out that the adjustment of monetary policy in the United States will have a significant impact on the global economy. First of all, the slowing down of growth in the U.S. will lead to lower demand and lower imports. Secondly, a strong dollar will depreciate the currencies of various countries. The impact of these two factors will immensely affect the world. At the same time, the aggressive policies of the Fed have caused volatility in the global financial market, which may not only burst the global capital bubble but also have a chained impact on the economies of various countries, exacerbating the risk of a new round of crisis. If the Fed continues to aggressively tighten policy in the future as expected by the market, the impact will become even stronger, driving the global economy to further fragmentation and possibly triggering a new round of worldwide economic and social crises.

Final analysis conclusion:

The continuous tightening of the Federal Reserve's monetary policy is driving the ongoing appreciation of the U.S. dollar. While it helps the U.S. to ease huge inflationary pressures, it is not conducive to global economic growth, even for the U.S. itself. This will not only bring a new round of impact on the international capital market, but also further fragment the global economic structure and aggravate the risks of crisis.