Guotai Haitong: Will the US dollar collapse?

The credibility of the United States is damaging everyone's trust in the US dollar. Because other economies hold US dollars or US financial assets, they are essentially lending money to the United States, resulting in a relationship of creditor and debtor. The US government's sanctions are like defaulting on the US dollar "bonds". This is equivalent to a company that has borrowed money from investors not repaying it due to a poor relationship. If such a default event occurs, other economies will need to consider whether their future relationship with the United States can remain stable and whether they should continue to lend money to the United States. Economies that are expected to have unstable relationships with the United States in the future will need to continuously reduce their holdings and use of US dollars and assets, leading to a decrease in demand for the US dollar due to a decrease in credibility.The rise in gold prices essentially proves that the credit of the US dollar is declining. In our series "Global Currency Changes", we introduced a new pricing model for gold. Gold is a non-interest-bearing asset, with an actual interest rate of zero. Therefore, when the real interest rate of the US dollar increases, the willingness of people to hold US dollar assets increases, and the price of gold comes under pressure. On the other hand, when the real interest rate of the US dollar decreases, the willingness of investors to hold US dollar assets decreases, and the price of gold rises. There is a clear mirror relationship between the real interest rate of the US dollar and gold. However, since 2022, the US economy has not shown significant growth, yet the actual interest rate of the US dollar has risen to its highest level since 2009. Despite the high real interest rate of the US dollar, people are still willing to hold a non-interest-bearing gold asset, which in itself indicates a decline in the credit of the US dollar. The trend of the international credit of the US dollar actually depends on the evolution of the global trade and monetary system. In our series "Global Currency Changes", we have also discussed the exploration of the medium- to long-term trends in the global trade system and monetary system. Over the past few decades, global trade and finance have reached a deep interdependence. If this decouples too quickly in the short term, it will have a significant impact on the economies of all countries globally. Therefore, in the medium to long term, the certainty of the trends in global trade and currency will be much higher. From a trade perspective, although there is high short-term uncertainty, the competitiveness of Chinese manufacturing remains strong in the medium to long term. Most manufacturing is difficult to return to the US, and third-party economies also struggle to quickly take over manufacturing production. If the US decouples too quickly, internal pressure and resistance will continue to increase, ultimately needing to conform to the laws of economic development. Changes in international relations must also be considered as another dimension, with direct economic links between China and the US slowly declining while indirect connections may be slowly increasing. The "going global" strategy of Chinese companies and their globalization initiatives remain a medium- to long-term trend. From a monetary perspective, every economy needs to balance economic stability with currency stability and security factors in international relations in choosing which currency to use for international trade settlements and official reserve allocations. Looking at the US dollar, the more unconventional operations by the Trump administration, the more pressure and resistance it will face. This will likely result in some corrective measures in the future, with many policies of the new US administration in four years possibly being different. In the long term, the ability to make corrections is crucial for sustained currency stability. However, each economy needs to assess its relationship with the US to make its own international currency choices. In the long term, the global currency system may slowly move towards differentiation, and the credit of the US dollar may slowly decline. However, in the short term, the uncertainty facing the credit of the US dollar remains high. After Western countries froze Russia's foreign exchange reserves in 2022, the credit of the US dollar has been shaken. The policies of the Trump administration have a high level of uncertainty, and while they may not intentionally undermine the credit of the US dollar or reduce its international stature, it cannot be assumed that they will always be rational in their policy direction. If improperly executed, these policies may have a significant impact on the credit of the US dollar. Once trust is damaged, even if the Trump administration reverses these policies, rebuilding trust becomes difficult. What practices could further damage the credit of the US dollar? We can broadly divide them into two categories. One is disrupting global trade policies. We have already discussed that the global trade and monetary systems are mirror images, and disrupting global trade is essentially undermining the global currency system. If there is no trade between countries, there will be no need for the US dollar in international trade settlements. For example, if the Trump administration sparked a trade war globally, the demand for the US dollar would significantly decrease as global trade volumes plummet. The other type of practice is disrupting the global financial system. For instance, the US using the position of the US dollar in the global financial system to further limit more countries from using the SWIFT system for dollar payments or freezing or confiscating more foreign exchange reserves of economies. Currently, the Trump administration's sanctions are primarily in the trade and tariff areas, but if financial measures are used to pressure other economies, the impact on the credit of the US dollar could be more direct. Overall, the US has benefited greatly from globalization, but as the US pushes for globalization, the previous beneficiary, the US dollar, may suffer. As stated in our series "Global Currency Changes", choosing between having a trade surplus or having the US dollar presents a dilemma for the Trump administration. If the policies of the Trump administration are not implemented properly, they could further damage the credit of the US dollar, potentially accelerating trends that were expected to occur slowly or not occur at all in the short term. If the global currency system goes through rapid reshaping in the short term, the pricing of global asset classes will fluctuate significantly. The direction of asset pricing can be compared to the Latin American debt crisis of the 1980s. Although the extent of reshaping of asset classes may not be as extreme, a declining credit of a currency often leads to currency devaluation, inflation, and an increase in nominal and real interest rates. The recent sharp decline in the US dollar index and the surge in gold prices, along with the significant increase in real and nominal US interest rates, may already reflect a change in the credit of the US dollar. If the deterioration of the credit of the US dollar continues, US bonds may indeed become a problem. Therefore, in the future, it is crucial to closely monitor the policies and actions of the Trump administration, as there is still significant uncertainty in the short-term changes in the credit of the US dollar. Trust is a crucial foundation of the global trade and currency system, and once lost, it often requires a long history to rebuild.Regularly, it may not necessarily fix it.Risk Warning: Global geopolitical risks; global economic changes; uncertainties in US policy risks This article was taken from the "Liang Zhonghua Macro Research" WeChat public account; GMTEight Editor: Chen Xiaoyi.