Euro Cut Sparks Dollar Slide

Firstly, the European Central Bank's decision to cut interest rates should have been beneficial for the dollar, but surprisingly, the dollar experienced a decline.

Additionally, at the beginning of this month, Japan’s Prime Minister indicated that there would be no interest rate hike, but it’s unexpected that less than half a month later, the Bank of Japan began discussing the possibility of raising rates.

Thirdly, the U.S. is consistently creating expectations to deter capital from flowing into China, yet China responded adeptly, leading to another significant rise in the A-shares and a substantial influx of foreign capital.

What exactly is happening?

On Thursday evening, the European Central Bank suddenly announced a 25 basis point interest rate cut. In this context, it should favor the dollar's performance, as post-rate cut, the eurozone’s rates are evidently lower than the U.S. federal rate, widening the interest rate gap by 25 basis points.

However, unexpectedly, after this rate cut decision was made last night, the dollar index saw a marked and swift decline.

Meanwhile, the euro's exchange rate against the dollar actually rose, now standing at 1.0838.

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Another factor exerting pressure on the dollar is the potential for a rate hike in Japan.

When the newly appointed Prime Minister Shigeru Ishiba took office, he made conciliatory statements indicating that the Bank of Japan would not raise rates in the short term, providing some relief to the U.S.

However, it’s unexpected that BOJ officials have now begun intensively discussing the possibility of future rate hikes, reiterating that inflation data has shown Japan is fully escaping deflation. Monetary normalization is an inevitable trend.

Despite the recent depreciation of the yen, even falling below 150 at one point, if a rate hike occurs, the yen may surge sharply, similar to the spike seen at the end of July, putting significant pressure on the dollar index.

Capitalizing on this opportunity, the Chinese yuan also launched a counterattack. Yesterday, the offshore yuan exchange rate reached 7.1470 but has now retraced to 7.1165, with a maximum intra-day increase of 300 points.

Concurrently, the A-shares experienced substantial increases on Friday, with the ChiNext index rising as much as 7.95%, and overall trading volume exceeding 20 trillion.

So, after years of monetary battle, has China emerged victorious?

Many hold this view, especially after the Federal Reserve not only initiated rate cuts but did so in a significant manner by 50 basis points.

However, finance is at the core of America, with the dollar at its foundation. America cannot exert global dominance based solely on manufacturing.

Thus, the U.S. might temporarily compromise, but it will never completely abandon this financial war.

Not long ago, during a U.S. Treasury conference, Powell emphasized via video that he hopes the Fed’s balance sheet gets as small as possible.

Perhaps it was at this moment that everyone realized, despite the U.S. beginning to cut rates, the actions to reduce the balance sheet are still ongoing.

From Powell's remarks, it can be inferred that the balance sheet reduction will not only continue but will persist as a strategy.

This signifies that even as the dollar enters a rate-cut cycle, it will still tighten the monetary supply through balance sheet reduction, maintaining the dollar's strength.

Previously, when the Fed first cut rates, it significantly reduced by 50 basis points, potentially aiming to entice other central banks to follow suit and implement substantial rate cuts.

Now, with the European Central Bank's 25 basis point cut, this may be seen as aligned with the Fed's expectations.

We should note that the Fed might halt rate cuts at any time in the future, or even start increasing rates again to widen the interest rate gap with other currencies.

This could not only curb the outflow of the dollar but may also trigger a new wave of capital influx.

The fact that the dollar index has actually risen since the rate cuts in late September reflects this trend.

However, after adjustments, the substantial rise in China’s A-shares has boosted confidence, and the trading volume exceeding 20 trillion demonstrates a significant influx of capital that the U.S. cannot block.

The fortunes of China and the U.S. may have already reversed.