Source: Investing
Data as of May 7, 2024

Global Economic Challenges Amidst USD StrengthThe Dominance of the US Dollar and Economic Power

The robust value of the US dollar as the primary currency in the international monetary system is strongly supported by the steady growth of the US economy. Key factors such as the depth and liquidity of US capital markets, coupled with robust property rights protection, strong sovereign credit ratings, the rule of law, and an open capital account, constitute critical factors in maintaining the US dollar's position.

The interest rates set by the Federal Reserve System significantly impact global borrowing costs, highlighting the core role of the US dollar in the global economy. Recent strong performance in the US stock market, GDP growth exceeding 2%, expectations of Fed rate hikes, and the upward trend in 10-year Treasury yields further reinforce the US dollar's strong position.

Why the US Dollar Maintains Global Dominance?
The reasons for the US dollar's global dominance can be summarized as follows:

●Steady Growth of the US Economy: The sustained healthy performance of the US economy forms the basis for the robustness of the US dollar.
●US Interest Rate Policy: The interest rates set by the Federal Reserve significantly affect global borrowing costs, reflecting the core role of the US dollar in global capital flows.
●Depth and Liquidity of Capital Markets: The depth and liquidity of US capital markets provide a stable and reliable environment for capital raising and investment, unmatched by other global markets.
●Property Rights Protection: Strong protection of property rights in the US enhances investor confidence.
●Sovereign Credit Ratings: The US enjoys strong sovereign credit ratings, supporting the US dollar's status as a safe asset.
●Rule of Law: The stability of the rule of law provides a predictable business environment for market participants.
●Open Capital Account: The openness of the capital account promotes the free flow of capital, enhancing the US dollar's international status.
●Global Reserve Currency Role: As the world's leading reserve currency, fluctuations in the value of the US dollar do not fundamentally affect its role in the global economy.

These factors collectively contribute to the US dollar maintaining its dominant position globally, even in the face of discussions on de-dollarization and market fluctuations.The US dollar continues to play a stable role in international trade and finance.

Macro Forecasts and Risk Balance by Morgan Stanley
Morgan Stanley economists have recently raised their forecasts for US growth and inflation, and delayed expectations for the Fed's first rate cut. These changes may impact bullish views on the US dollar. If rising rates begin to pressure the stock market, this could lead to a widespread appreciation of the US dollar. While this is not the prevailing scenario presently, markets are increasingly concerned about this risk, indicating a growing inclination towards a higher dollar rather than a lower one.

Additionally, economic uncertainties in other regions, such as political instability in Europe and China's slowing economic growth, also increase market demand for the US dollar as a safe-haven asset.

Profound Impact of USD Policies on World Stock Markets and the Global Economy
The strong momentum of the US dollar plays a critical role in the global economy and stock markets, with policy changes having far-reaching effects worldwide. The strengthening dollar poses challenges to countries borrowing in dollars, as they need to repay more debt, exacerbating global financial tightening. Moreover, differences in monetary policies between the US and other countries, such as rising US rates versus unchanged Japanese rates, lead to significant exchange rate fluctuations, such as the weakening of the yen against the dollar. These differences not only reflect differences in economic fundamentals but also different needs for monetary policy.

In terms of the stock market, the strong dollar attracts investors to high-yield and safe assets in the US, potentially causing capital outflows from emerging markets to the US, putting pressure on emerging market stock markets. Additionally, a stronger dollar may weaken the international competitiveness of US export goods, affecting global trade balances and negatively impacting stock markets in export-dependent countries. The strengthening dollar also increases the debt-servicing costs for entities holding dollar-denominated debt, particularly for countries with limited foreign exchange reserves, which may increase the risk of debt defaults, affecting the stability of global financial markets.

Changes in Fed policy, such as adjustments in interest rates, have significant spillover effects on other countries' monetary policies through capital flows and exchange rate changes. Additionally, as foreign investors increase their investments in the Japanese stock market, they hedge against foreign exchange risk by repurchasing dollars in the forward market, increasing the demand for dollars and driving the appreciation of the dollar against the yen.These factors collectively shape the strong position of the dollar in the global economy and continue to influence the dynamics of international financial markets.

Source: Investing
Data as of May 7, 2024

As a global reserve currency widely used in international trade and cross-border lending, changes in Fed policy through capital flows and exchange rate changes significantly impact other countries' monetary policies and economic conditions. Economic uncertainties in other regions, such as political instability in Europe and China's slowing economic growth, also increase market demand for the US dollar as a safe-haven asset. Therefore, US dollar policy not only affects the US domestic economy but also has far-reaching effects on the stability and development of the global economy and stock markets.

Potential Risks of USD Strength
As the dominant global currency, the US dollar's strength entails some potential risks. One of the most obvious risks is the resurgence of growth in other major economies, such as Europe and China. This economic recovery may offer investors more attractive investment channels, thereby reducing the pursuit of US dollar assets. If economic growth significantly accelerates in other regions globally, the attractiveness of the US dollar as a safe-haven asset may weaken as investors may turn to markets with brighter growth prospects.

Currency policy divergence is also a significant factor. Different central banks of various countries adopting different interest rate policies may lead to changes in capital flows, affecting the value and demand for the US dollar. Additionally, the performance of the US stock market and GDP growth rate, along with expectations of Fed rate hikes, are variables that affect the strength of the US dollar. If these factors undergo adverse changes, they may weaken the international status of the US dollar.

Uncertainties and volatility in global financial markets may also pose risks to the US dollar. Changes in market sentiment, escalation of international trade tensions, and uncertainties in geopolitical events may lead investors to reassess US dollar assets. Therefore, while the US dollar remains strong presently, its future trajectory will depend on various factors in the global economy and financial markets.

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