The Federal Reserve initiated interest rate cuts in September, with continued follow-ups in October and December. This round of global 'liquidity reconstruction' will have impacts that go beyond just the rise and fall of the dollar; it will also influence the game theory of monetary policies in various countries and the deep changes in capital flows.
First, let's look at the US dollar - devaluation is basically a certainty. The current strength of the dollar index relies not so much on the solid fundamentals of the US economy, but more on the 'relative advantage' of the lagging European economy. Continuous interest rate cuts combined with fiscal easing will inevitably loosen the foundation of dollar credit. The unequal tariff agreements previously signed by Japan and Europe may at most cause a temporary spike in the dollar, while the doubts raised by the non-farm payroll data have already started to push the dollar down.
The logical chain behind this is clear: monetary and fiscal 'double easing' dilutes credit, and the attractiveness of reserve currencies naturally declines; moreover, devaluation itself is a covert strategy of the US - it can alleviate debt pressure while improving trade deficits through export competitiveness, which is an old tactic for dealing with structural problems.
Now looking at our side - the room for maneuver in monetary policy has truly opened up. Previously, concerns about the large US-China interest rate spread made us fear capital outflow, which kept our easing policies constrained. If the Federal Reserve starts a rate cut cycle first, and US real interest rates decline, the pressure from capital outflow will be much smaller. In the second half of the year, our central bank may follow up with rate cuts and reserve requirement reductions, with coordinated fiscal and monetary efforts to boost the economy being highly likely.
Looking back at the '924 policy shift' in September 2023, it was the unexpected 50 basis point cut by the Federal Reserve that provided external space, but then Powell suddenly halted it, putting us in a rather passive position. If the Federal Reserve can maintain continuous easing this time, these external constraints will be significantly reduced.
Essentially, the tug-of-war between the US and Chinese economies is a contest of policy endurance. The US fears that high interest rates will trigger inflation and national debt interest crises, while we need to address local debt and real estate adjustments. The question was who would ease first and who would be passive. Now, with the Federal Reserve continuously cutting rates, this balance may be disrupted.
Moreover, the uncertainty within the United States - for example, if Trump comes in and replaces Powell, policies may become looser - could actually alleviate our external pressures. Once the dollar tide restarts, our monetary policy can be more flexible, and in the second half of the year, we might take over the baton from fiscal policy and become a key support for economic growth.
