Oct 7, 2022
The Fed raised the federal funds rate by 75 bps to the 3%-3.25% range during its
September meeting (graph above). US dollar appreciated as international capital flowed in
for higher returns in the money and capital markets in the USA. Prof. Dr. Tang Zhimin, the
Director of CASPIM, assesses its impacts.
A strong dollar is a double-edged sword for USA against other countries. For trading
partners, a weak local currency may be beneficial for exporters, but it also pushes up the
price of imports. More frightening is the growing appetite of the financial predators of Wall
Street to snatch financial or real assets around the world.
But is the strong dollar sustainable? The US dollar index (DXY) is moving up from 90 at
the end of 2020 to 112 recently. Its peak is around 160 in the 1980’s (See graphs below).
How high it may go in the near future? Two points pertain: First, how far could Fed
continue its rate hike? Powell expected the rate to be 4.6% in 2023. However the higher
rate is also a double-edged sword for US economy: it may bring down inflation, but more
likely trigger a new recession. Second, how far the dollar appreciation may be driven by
the Fed rate hike? The market force may work when the current account deficit is
deteriorating and foreign investors are weary when the bond price recovers.