The world has become somewhat uncontrollable; this is the friction brought about by the fierce game between multiple global forces during the economic cycle transition. This is often inevitable but carries a lot of uncertainty. As the two largest economies in the world, the competition between China and the US is the main theme of the global power struggle.
Many people have a question: The Federal Reserve has already cut rates twice and entered a rate-cutting cycle, so why is the US dollar index rising and continuously setting new highs?
According to normal logic, as long as the Federal Reserve starts to cut rates, the dollar is likely to depreciate. However, the current situation is exactly the opposite, and the reasons behind this are multifaceted.
On one hand, the market has begun to expect 're-inflation' in the US in 2025. Although the current inflation data will not affect the Fed's decision to continue cutting rates in December, the uncertainty for next year has increased.
Especially after Trump takes office next year, he will launch various measures such as tariffs and tax cuts, all of which will further raise inflation in the US. As a result, the market predicts that the pace of US rate cuts may slow down next year, which is one reason for the rise of the dollar.
On the other hand, not only is the US lowering interest rates, but most countries around the world, including the EU, the UK, Canada, and Switzerland, are also in a rate-cutting cycle. Many Western countries have started reducing rates earlier and at a more aggressive pace than the US.
The European Central Bank has cut rates for the fourth time this year, and the Bank of Canada has cut rates by a total of 175 basis points this year, compared to the US's two cuts totaling 75 basis points. The US rate cuts are relatively mild, while allies cut rates more aggressively. The dollar maintains relatively high interest rates, attracting funds into the US, while the currencies of US allies weaken compared to the dollar, leading to a stronger dollar index.
Moreover, the economic performance of the US stands out among developed countries. The slow economic growth of allies such as the EU, Japan, South Korea, and Australia, which lags far behind the US, leads to capital fleeing to the US, causing the dollar to surge.
In simple terms, it is not that the US is strong, but that the allies are simply too weak. This is a world of relative decline, where the US breaks through again and again due to the advantages of dollar hegemony, while its allies perform poorly, leading to another surge of funds into the US against the backdrop of US rate cuts.
Another factor is that the market is trading on the expectation that Trump will raise tariffs on many allies after taking office next year. Therefore, the market expresses concern about the economies of allies next year, and funds are preemptively flowing into the US. This is also why US stocks rise after rate hikes and continue to rise after rate cuts; allies are an important fuel and blood supply for the US's dollar hegemony.
From the perspective of the US, maintaining the position of dollar hegemony is paramount, and the core of dollar hegemony is to sustain the rise of the dollar. As long as the dollar rises, global funds will continue to flow into the US, providing a lifeline for the US economy while also masking many of the problems and hidden dangers that the US faces.
However, under the backdrop of rate cuts, the dollar cannot continue to rise indefinitely. The current rise of the dollar is like dancing with shackles; once it stops, everyone will see its true nature.
The continuous rise of the US dollar further suppresses gold, leading to a short-term decline in gold prices. Meanwhile, the People's Bank of China has increased its gold holdings again after a six-month hiatus. In November this year, China's official gold reserves increased by 4.5 tons. What does this mean?
According to data released by the World Gold Council, central banks around the world added 60 tons of gold in October this year, setting a new record. The main driver behind the increase in gold prices in recent years has been the accumulation of gold by central banks. After a six-month hiatus, our country has increased its gold holdings again. On one hand, this aims to increase the proportion of gold in foreign reserves, and on the other hand, it helps stabilize the RMB exchange rate, while possibly also aiming to push up gold prices.
The more chaotic the world becomes, the more excited the US is, as safe-haven funds flow into the US, pushing up the dollar. Some of these funds go to buy gold, while the US takes advantage of its dollar hegemony to siphon off from allies, driving up Bitcoin, and funds are pouring into the US, while gold prices have declined.
Central banks around the world are continuously increasing their gold holdings, which boosts gold prices. This is equivalent to diverting some funds from safe-haven investments, intercepting some funds that were originally meant to flow into the US. Furthermore, countries are selling US Treasury bonds, but the rise of the dollar obscures the true extent of their reduction in dollar reserves.
However, this game has just begun. The China-US 'water pump' has started, releasing significant signals. According to the content of this month's high-level meeting, our country will adopt a 'moderately loose' monetary policy in 2025, and the monetary expansion will restart, once again pulling out the 'water pump' to draw from the world.
At this stage, the US is drawing funds from around the world, attracting capital inflows. However, under the backdrop of a rate-cutting cycle, the dollar's rise cannot be sustained for long because, after the Fed cuts rates, it does not expand its balance sheet in sync but continues to shrink it. This is the last struggle before a crisis breaks out.
The unlimited debt accumulation and deficit problem of the US dollar will explode in the next four years, specifically during Trump's four-year term. We may witness a global collapse and financial storm, which will be a major reshuffle and an important turning point in the global capital market, where the East rises and the West falls.