Since March 19, when it stood 103, the dollar index has started a correction mode and has fallen nearly 11% in the past five months. On August 18, it even dropped to 92.123, a new low in recent two years. This process is roughly synchronized with the development of the epidemic in the United States. At the beginning of March, when the virus spread from Asia to the world, all stock markets, foreign exchange markets and bond markets were spared. At a time when the U.S. stock market experienced four fusions in 10 days, and the global financial market was in a miserable situation, the Federal Reserve and the US Treasury Department joined hands to win trumps one after another, with unlimited QE, a $2 trillion rescue plan, and then another $2.3 trillion The heart of the financial market was finally stabilized, followed by a round of stock market highs. However, the number of confirmed cases increased by tens of thousands every day due to the ineffective response of the US government to the epidemic. Even the most optimistic economists believe that the economic pain caused by the epidemic will last until the end of this year. Unemployment is rising, the epidemic is still spreading in many states, and the two parties in Congress are still arguing over a new rescue package, and the market is still disappointed. < / P > < p > investors choose to sell dollars. In July, the dollar index fell 4.4%, the highest drop in the past decade. On August 19, the dollar index fell to a low of 92.1508. < / P > < p > as the world’s number one currency, what does the continuous depreciation of the US dollar mean for the global monetary system? At present, the dollar index is hovering around 92. Will it continue to fall in the future? What will happen to China’s financial market and if so? With a variety of questions, we interviewed Stephen Roach, former chairman of Morgan Stanley Asia and a senior researcher at Yale University. He believes that in addition to some short-term trading factors, there are three main reasons for this round of dollar decline: first, the US macroeconomic imbalance has been very serious; second, the United States has given up the role of global leadership; third, the rise of the euro. < p > < p > Q: in July, the US dollar index fell by 4.4%, the highest drop in the past 10 years. Why? You pointed out that the US dollar will depreciate since June. What was the basis for your judgment at that time? Stephen Roach: in addition to some short-term trading factors, I think there are three main reasons for the recent decline in the US dollar index. First of all, the problem of macroeconomic imbalance in the United States is very serious. In the first quarter before the outbreak, the net domestic savings rate accounted for only 2.9% of national income, less than half of the historical average of 7% from 1960 to 2005. As the budget deficit surges, the net domestic savings rate (including the savings of businesses, individuals and government departments adjusted for capital depreciation) is falling sharply to negative value, which will lead to a new record of – 6.3% in 2005. When the current account deficit deteriorates sharply, as a stabilization mechanism, all countries’ currencies will make corresponding adjustments. The United States is no exception. < / P > < p > Second, the United States has given up its global leadership role. Unfortunately, the United States has recently been ahead of the rest in terms of trade protectionism policies, such as de globalization, “decoupling theory”, and the imposition of tariffs on China. The United States has taken the initiative to weaken its support for global institutions such as the world trade organization, the World Health Organization and the NATO alliance, and at the same time, it has damaged its relations with Canada and its European allies. Compared with other countries, we have done the worst in the world in curbing the new coronavirus, which is very important for assessing currency risk. At the same time, the United States is facing a systematic problem of racism. The United States has always looked superior to other countries, but it is not. The third reason is the euro. People often ask me, which currency will be stronger in the future? I think it will be the euro. It has now appreciated. But unlike the overvalued dollar, the euro is undervalued (the dollar is still about 30% above its 2011 low). Frankly, I have always been skeptical about the future of the EMU, because they do not have a pan European fiscal policy to support it. But on July 21 local time, after intense negotiations, European leaders reached an agreement on the next generation EU fund. The plan provides a pan European fiscal policy and includes provisions for Member States to issue sovereign bonds for financing. Just as the European Central Bank said during the sovereign debt crisis that it would save the euro “at all costs,” this time European political leaders took action to begin to address the long-standing absence of a fiscal union in the European Economic and monetary union, to the surprise of all of us, including myself. As a result, I believe that the US dollar will undergo a major adjustment in the next few years, possibly by 35% (in real terms), due to three reasons: the US macroeconomic imbalance, the loss of global leadership, and the strengthening of the euro. This will soon be proved. < / P > < p > it is worth noting that the depreciation of the US dollar may occur in a relatively short period of time rather than in a longer period (10 years or more). I think this decline in the dollar will be a short but intensive process, because the new coronavirus accelerates a lot of things. The global economy came to an abrupt end in two months, and I think the foreign exchange market could be the same. The U.S. current account deficit is likely to set a new record in a very short period of time – a key factor in the direction of the dollar, in my view. < / P > < p > Stephen Roach: the answer to this question has been mentioned in the first question. I think the decisive factor is that the depreciation adjusted U.S. domestic savings rate is likely to fall sharply to negative by the end of this year, and further decline in 2021. This is a very serious matter. Because it means that we are consuming the savings needed for future economic growth in the United States. How does an economy without savings grow? < / P > < p > take China as an example. China has a lot of savings, and some would say you save too much, but these savings can fund growth in productivity, infrastructure and human capital investment. So to do that, America needs to save more. The United States now has many serious problems that need to be solved with savings. So I think the decline in the dollar will accelerate when it is clear that the savings rate will move into a negative range. It’s still a prediction, because we don’t have the actual data to support that. < / P > < p > Q: in the past, the US dollar index fell sharply in the past three periods: 1985-19882002-20042009-2011. What is the difference between this round of US dollar index decline and the past? < / P > < p > Stephen Roach: the dollar has indeed experienced a similar decline. In the 1970s, the dollar index fell by 33%; in the mid-1980s, it fell again by 33%; at the beginning of the 21st century, it fell by 28%. As a result, I don’t think the dollar index will fall by 35%, compared with the previous weak period of the dollar. It’s true that the decline of 35% is very large, but we already have precedents, which have happened several times in the past 50 years. < / P > < p > it is clear that each decline occurred in a different historical period. In the 1970s, the depreciation of the US dollar occurred at a time when inflation accelerated sharply in the United States, and the Federal Reserve was unable or unwilling to raise interest rates to a level sufficient to control inflation. Therefore, the inflation adjusted real interest rate has entered a negative range, which can not support the US dollar at all. In the mid-1980s, after the United States signed the Plaza Agreement with Japan, Federal Germany, France and the United Kingdom in September 1985, various countries coordinated their actions and actively intervened in the international currency market, resulting in the devaluation of the dollar, which was seriously overvalued at that time. At the same time, the yen rose sharply, which was the main factor leading to the decline of the US dollar in the mid-1980s.
has long been divided about the reasons for the decline in the US dollar in the early twenty-first Century, but most people believe that after the dotcom bubble burst, the Federal Reserve maintained a very loose monetary policy for a long time. It can be seen from this that the background of each dollar decline is different. At the height of the global financial crisis from 2008 to 2009, the dollar benefited as a so-called safe asset – a feature that has emerged in previous crises. At first, the dollar appreciated, but after the crisis, it began to fall. I think this is very similar to what happened in this new outbreak. In March of this year, when the US dollar suddenly fell, the world economy continued to fall sharply. < / P > < p > Stephen Roach: first of all, the depreciation of the US dollar is not conducive to the stability of the financial markets in the United States and the world. It may lead to extensive and sharp adjustments in the US stock market and even the bond market, which has always been a strong performance, leading to large fluctuations in the prices of most financial assets. The fluctuation of financial asset prices is a real potential risk for the real economy, because the operation of the real economy in the United States is heavily dependent on the value of assets. Secondly, a weak US dollar will bring upward pressure on US inflation. Inflation in the United States has been very good in the past few years, which gives the Fed room to keep interest rates close to zero. But if inflation rises and the Fed does not act – in line with the Fed’s latest monetary policy guidelines – it will push real interest rates into negative territory. Once that happens, it will repeat what we saw in the 1970s, when negative real interest rates weakened the dollar. < / P > < p > Third, the Federal Reserve has indicated that it will continue to maintain a very loose policy environment, keeping policy interest rates close to zero indefinitely. However, if, as I speculated, a sharp depreciation of the dollar would push up inflation in the United States. By then, the Fed may have to change its view. No matter what reason the Fed tightens monetary policy, it will bring risks to the real economy, because the real economy has been used to keeping interest rates close to zero for a long time. < p > < p > Q: GDP in the second quarter of the United States fell at an annual rate of 32.9%, the largest decline since the 1940s. Now the United States seems to be doing a poor job in epidemic control. What do you think of the prospects of the U.S. economy this year and in the next few years? < / P > < p > Stephen Roach: I think the U.S. economy will be very volatile during this period, to a large extent, it will be weaker than before the epidemic, and the recovery process will be full of challenges. The U.S. economy is expected to rebound sharply in the third quarter of this year. The basis of this judgment is the monthly trend of retail, housing construction and other data. But the rebound in the third quarter may not make up for half of the economic losses in the second quarter. In the fourth quarter of this year, the U.S. economy is likely to grow negatively again, mainly due to new outbreaks in the South and west of the United States. This highlights an important aspect of economic recovery in the context of the epidemic: the resumption of work and production, which is easier to recover from the supply side than from the demand side. For consumers to participate in the face of