The year 2024 has been marked by a significant focus on the supremacy of the U.S. dollar in the global economyThis has been highlighted by insights from prominent financial institutions such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), which have scrutinized the performance of over forty major currencies globallyIn stark contrast to the prevailing trend of depreciation of many currencies against the dollar, only a few currencies, such as the British pound and the South African rand, have exhibited any appreciation.

Indeed, we have observed a widespread depreciation of various currencies including the Chinese yuan, Indian rupee, Russian ruble, South Korean won, Japanese yen, Canadian dollar, Vietnamese dong, Brazilian real, Turkish lira, and Thai baht against the dollarNotably, the yuan has depreciated by 1.05%, while the Argentine peso has suffered a staggering depreciation of nearly 70%.

Looking ahead to 2025, there are predictions that the dollar's dominance will remain unabated.

By the end of 2024, the exchange rate between the yuan and the dollar firmly settled in the 7.3 rangeThis reflects market responses to the impending U.S. presidential election, where potential shifts towards more aggressive policies, such as increased tariffs, loom large, erecting a massive trade barrier against imports into the United States.

This situation not only raises the cost for products manufactured in countries like China, Vietnam, South Korea, Japan, India, Mexico, and Malaysia, making it significantly more expensive to penetrate the U.S. market, it also escalates the purchasing costs for American importersAs a consequence, many multinational corporations are compelled to boost their investments within the United States.

From a conventional economic perspective, when the prices of imported goods rise, it is the traders who will not absorb the increased costs; instead, these expenses will inevitably be passed on to consumers, consequently driving inflation upwards

Advertisements

When journalists pose the question about whether dramatically increasing tariffs might trigger a resurgence in inflation that had recently stabilized in the U.S., it indeed raises a critical point of contention.

However, the understanding of his tariff policies seems to be somewhat misguided; he upholds the belief that no one can easily relinquish their stake in the U.S., the world's paramount consumer marketWhen tariffs rise, foreign manufacturers who may have previously relocated their operations will consider bringing their factories back to the U.S.

Despite this inclination, the reality is that the labor pool in the U.S. is limited and labor costs are significantly higherThus, even if some businesses are compelled to invest and set up operations domestically, the quantity and pricing of goods manufactured in the U.S. will not rival that of imported goods in any substantial way.

Even if the number of manufacturing returns to the U.S. remains relatively modest, inflation is still likely to re-emergeHowever, the influx of additional investments as a result is a certaintyInternational capital appears to be wary, akin to frightened birds, concerning the negative ramifications that these tariff policies might inflict on the economies of the countries subjected to them.

The immediate consequence of this scenario at the monetary level is the sustained strength of the dollar's exchange rate, which is poised to endure for an extended periodAcross the foreseeable future of 2025, other currencies such as the yuan, yen, won, dong, rupee, ruble, and Malaysian ringgit are anticipated to continue depreciating.

The yuan's exchange rate is likely to breach the 7.5 mark.

When examining the relative weakness of the yuan in 2024, we previously mentioned the lucrative interest rate differential between the U.S. and ChinaHolding onto U.S. dollars and assets presents a higher yield compared to holding the yuan and its assets, a key motivator driving investors toward accumulating more dollars while offloading yuan.

According to the International Monetary Fund's publicly available data on global allocated foreign exchange reserves, as of the third quarter of 2024, central banks and monetary authorities held dollar amounts totaling $67,969.8 billion, a notable increase from $64,965.2 billion the previous year, marking a net increase of over $300 billion.

In stark contrast, the value of yuan held by foreign central banks, when converted into dollars, stood at only $25.717 billion, which shows a decrease of $3.44 billion compared to $26.061 billion from the previous year

Advertisements

This decline illustrates the yuan's depreciation from a dollar perspective.

Despite the depreciating yuan, the dollar remains fundamentally unchanged, yet the amount of dollar foreign exchange reserves held by various nations has risen significantlyThis indirectly indicates that the reduction in the yuan's global foreign reserve position results not only from currency depreciation but also from numerous countries opting to sell yuan in favor of a dollar position.

The scenario for this year is expected to become increasingly complexThe U.S. has explicitly announced intentions to impose higher tariffs on imported goods from China—although recently this has been softened to an “additional 10%” on existing tariffsShould negotiations between China and the U.S. falter, further hikes in tariffs are anticipated.

In this context, the interest rate differential remains influential, with capital movement from China back to the U.S. playing a crucial roleThe moderate depreciation of the yuan serves to suppress the apparent price increases for goods exported to the U.S. when expressed in dollars, creating a cumulative effect whereby the yuan could potentially dip below 7.5.

However, it is unlikely that the yuan will experience a drastic depreciation that would see it plummet to the 8 range.

Assertions suggesting that the yuan will face a profound devaluation lack substantiation and are unfoundedIn analyzing macroeconomic trends, one must be cognizant of not only the aspects that favor the U.S. but also those that pose disadvantagesHigh tariffs can wield effects akin to double-edged swords, inflicting damage on one's own economy as well.

Critics must not overlook the adversities inflicted on the U.S. by China’s retaliatory measures against detrimental U.S. actionsWhen China enacts proportional tariffs on U.S. products, it also targets the fundamental components that sustain U.S. hegemony, such as bolstering its sell-off of U.S

Advertisements

Advertisements

Advertisements