preface
The Federal Reserve really did not let the people of the world worry, and quietly pressed the "hot start button" and embarked on a "road of no return".
Some professionals have predicted the future situation, and the Fed's interest rate cut is not unexpected, but the 50 basis point cut is really unbelievable.
The U.S. dollar, unlike ordinary currencies, has been closely associated with gold for a long time.
As an important reference for asset pricing in countries around the world, the Federal Reserve has repeatedly cut interest rates, which has had a huge impact on the world's financial markets.
But surprisingly, after the dollar index fell to a low point in more than a year, the yuan exchange rate has been soaring.
The exchange rate has risen above the 7.10, 7.09, 7.08 and 7.07 marks one after another, and the rising momentum has been unstoppable.
Why does the Fed cut interest rates repeatedly? Why has our RMB exchange rate hit record highs?
1
There are many reasons for the US dollar to cut interest rates, the most important of which is inflation.
When the Fed cuts interest rates, it is a good thing for its domestic companies to a certain extent, but why is that?
For a large company, working capital is crucial.
As the dollar continues to cut interest rates, the cost of borrowing from banks will also decrease, which is also the most important thing for the United States.
Usually, interest rate cuts can indirectly promote enterprises to increase investment and expand the scale of investment.
Just like the global financial crisis in 2008, the United States was not immune to this turmoil.
As a result, after the crisis, the Federal Reserve has taken several interest rate cuts in response to the recession.
and even with a big wave of his hand, the interest rate will be maintained at a level close to zero for a long time.
A seemingly inconspicuous operation in the financial markets can cause an uproar.
Before cutting interest rates, the Fed played the role of "economic control center".
Although macroeconomic control has injected fresh impetus into United States' economic growth, there are also potential threats to interest rate cuts.
The first to suffer is the financial market, which has seen huge fluctuations within it.
It can be a challenge for an investor who has to re-evaluate the value of their assets and overhaul their previous strategies for the future.
When the Federal Reserve announced a new round of interest rate cuts, there was a wave of upward movement in the stock market.
However, over time, if interest rate cuts do not stimulate the economy as effectively as previously anticipated.
On the contrary, it will enter a vicious circle, making the inflation problem more severe, and the stock market will pull back or even fall!
2
The US dollar interest rate cut is a policy launched by the Federal Reserve to regulate the domestic economic development, why does the exchange rate of the RMB continue to rise because of this?
In fact, this phenomenon is an inevitable consequence and is easy to understand.
When the Fed cuts interest rates, it means that the relative returns of assets pegged to the dollar will fall as a result.
Let's assume that the interest rate on US dollar deposits used to be 5%, while the interest rate on RMB deposits was 4%.
However, as the Fed pushed forward with the interest rate cut policy, the US dollar deposit rate also fell to 4% or even lower.
However, the interest rate on RMB deposits has been relatively stable.
Therefore, for investors who pursue higher returns or yearn for stable income, it is better to convert their US dollar assets into RMB assets.
After all, there is an unwritten "guideline" in the international community, and the Fed's interest rate cuts are often a signal of a slowdown or even a recession in the global economy.
For financial investors, they will always try to reduce investment risk as much as possible, and the Fed's actions will undoubtedly undermine their confidence in the dollar market
Before the interest rate cut, many international investment institutions held a large number of US dollar bonds.
However, as the US dollar cut interest rates, these institutions also responded in a timely manner.
It was decided to reduce the holdings of US dollar bonds and turn to buy mainland government bonds or other assets related to the renminbi.
The demand for the renminbi in the international market is steadily rising, and we all know the relationship between supply and demand, and once the demand for goods continues to rise, it will naturally become "more valuable".
3
Of course, in addition to external factors, our own strong economic strength has also laid a solid foundation for the appreciation of the RMB.
In recent years, the mainland has made countless achievements in the field of economic development.
Even an authoritative institution like the International Monetary Fund (IMF) is quite sympathetic to the state of the mainland's economic development.
From their point of view, the mainland's economic growth rate in 2024 and even 2025 can be maintained between 4.1% and 4.6%.
Behind the success, of course, it is not that we are taking advantage of the dollar's interest rate cuts.
The mainland's progress in recent years is obvious to all, from textiles, electronic equipment and other daily household use, to machinery and equipment, high-precision instruments and other cutting-edge scientific and technological products, all of which have been recognized by all countries in the world.
Up to now, the growth trend of the mainland's total export trade is still strong.
Since the beginning of this year, the total export value has reached an astonishing 7.5 trillion US dollars, especially the performance of mechanical and electrical products, accounting for 50.7% of the total export value.
When Western countries were singing about the decline of the mainland, we dispelled their doubts with practical actions.
In just half a year, the added value of the mainland's industry has exceeded 10 trillion yuan.
Throughout the world, there is no country that can make such a breakthrough in the field of industrial development.
Our manufacturing industry has not only not fallen into a bottleneck, but has proved its strong development potential to the world.
Western countries have vigorously advocated "carbon neutrality", but few have put it into practical action.
Even if it is as strong as the United States, when advocating new energy vehicles, there is an unknown small calculation in mind.
The relevant subsidies only take effect on locally produced cars, and to put it in layman's terms, the United States government does not care whether new energy vehicles can be promoted in the United States.
Under the guise of green transformation, they are just supporting local industries and cracking down on foreign companies.
However, the mainland has done what it says it will do, especially the policy of exempting new energy vehicles from purchase tax.
Whether it is a joint venture brand or a domestic independent brand, as long as it is a new energy vehicle, it is within the effective range.
It is with the support of policies that mainland can be far ahead in the field of new energy vehicles, and even the output increased by 34.4% year-on-year.
In addition to the above, there is another factor that is easily overlooked – the trade surplus.
In June this year, trade exports were 1,930.4 billion yuan, imports were 1,526.2 billion yuan, and the surplus reached 405.2 billion yuan.
Why does the trade surplus also contribute to the appreciation of the renminbi to a certain extent?
Let's take a simple example, let's say that the villagers of a certain village are good at making handicrafts, which attracts a large number of people from outside the village to buy them.
As the trade spreads more and more, the village holds more and more currency outside the village.
But for the villagers, doing business is to make money, and in the end, they have to exchange the currency for their own village.
When there are more exports than imports, banks need to provide more domestic currency to exchange for foreign currencies in order to ensure market balance.
However, as the demand for village currency relative to foreign currency increases, it eventually leads to the continuous appreciation of the village currency.
This situation is more complex when applied to countries, but the principle is the same.
The existence of a trade surplus has led to an increase in the mainland's foreign exchange reserves, and the supply of foreign currency in the foreign exchange market is greater than the demand.
In order to maintain the balance of the market, the mainland central bank will have to issue more renminbi to exchange foreign currency.
However, while the demand for foreign exchange is relatively stable, the demand for the renminbi is still very large, so it will lead to appreciation.
As far as we ordinary people are concerned, if the renminbi in our hands is valuable, we will be able to exchange the same amount of renminbi for more foreign currencies, thus greatly enhancing the purchasing power of mainland consumers in the international arena.
epilogue
With the steady progress of the Belt and Road Initiative, the trend of RMB internationalization is becoming more and more obvious.
The importance of mainland enterprises in international trade is becoming more and more significant, and the era of dollar hegemony seems to be coming to an end!
In this magnificent economic and financial game, we must strengthen our self-confidence in the road, take our development path well, and take it step by step.
Instead of being like some people with ulterior motives, they are always opportunistic, and in the end they will only shoot themselves in the foot!