The investment is cyclic by nature and, since the end of World War II, a factor determining financial market cycles is the relative strength or weakness of the American Dollar.
The word “relative” is essential in a world where central banks have lost all independence. Today, comparing the US Dollar to the Euro doesn’t mean much anymore.
As a reminder, interest rates on the Euro have mainly become negatives for several years. And we have no indication that this strategy of the European Central Bank (BCE) will change …
By investing in bonds issued by the ECB, we are therefore certain of losing! Which is both uplifting and depressing.
The consequences of the Covid-19 crisis
Because of the pandemic, both the Fed and the ECB reacted in tandem; by increasing the size of their balance sheets and buying back assets to support their respective economies.
In other words, the amounts virtually printed by central banks are today colossal.
Hence the mistrust of investors who first sought refuge in gold then towards the bitcoin. But the latter has fallen steeply since the Chinese government decided to whistle the end of speculation …
So what is the point of continuing to measure the performance of the Dollar against the Euro? While the Chinese GDP has exceeded the GDP of the European Union and is expected to continue to progress about 5% per year compared to less than 1% in Europe?
It is therefore good compared to the Chinese Yuan that the performance of the US dollar should be measured. And here is the result over the last twelve months ( Google source ):
The Yuan stronger than the US Dollar?
Yes, and for a very simple reason.
Both US Presidents Trump and Biden have asked the FED to help them support the US economy. Due in particular to the sharp rise in unemployment caused by the Covid.
Meanwhile, the Chinese economy was back on its feet from the third quarter of 2020. And, against all odds, it broke export records in the second half of 2020!
In 2008, China responded to the financial crisis with a Keynesian stimulus by multiplying infrastructure projects across the country. But this time, the only projects in China concern the technology: in particular the deployment of 5G and the production of semiconductors.
At the same time, China has concluded strategic partnerships with Russia and other commodity-producing countries.
In addition, it has strongly encouraged its regional neighbors to use the Yuan as a bargaining chip. By guaranteeing them stability in terms of the exchange rate. Thanks in part to a “risk-free rate” of 2%, well above the American rate (0.25%), not to mention the European rate which is downright negative!
In the future, therefore, we will continue to keep an eye on the DXY index, due to the European bias of this index … But we will instead be watching closely the evolution of the US Dollar against the Yuan.
This should make it possible to measure in a much better way the relative health of the two greatest economic and political powers in the world.