The Federal Reserve has raised interest rates again, and on the early morning of May 4th, it announced an increase of 25 basis points, bringing the target range for the benchmark interest rate to 5% to 5.25%. This marks the 10th consecutive rate hike by the Federal Reserve since March 2022 and is the most significant in over 40 years.

Caught between the banking crisis and inflation, the Federal Reserve chose to suppress inflation at the risk of numerous bank bankruptcies, raising rates once more. However, looking at the inflation rate in the United States in April and the performance of the Chinese yuan, this may turn out to be another failed rate hike.

So, why did the Chinese yuan surge by 700 points after the U.S. dollar's rate hike? Why is it said that the Federal Reserve's recent rate hikes have been unsuccessful? And what about the "fire" in the dollar's backyard, with two major nations turning to the Chinese yuan?

Failed Rate Hike

In April, the United States once again experienced a storm of bank bankruptcies, with the core CPI remaining around 5.6%. The negative effects of the rate hike are becoming apparent.

Looking at the performance of the U.S. dollar's exchange rate after previous rate hikes by the Federal Reserve, it usually shows a strong increase. However, this time, the dollar did not show any significant movement.

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Logically, the Federal Reserve's rate hikes would lead to an acceleration of dollar repatriation, an increase in the financing costs of the dollar, and an appreciation of the dollar, which is not conducive to the expansion of reproduction in the U.S. economy.

In the most recent rate hikes, the dollar did not show a significant increase as it did in the past, indicating that the market's reaction to the Federal Reserve's rate hikes is becoming more indifferent. From the speed of repatriation, these rate hikes have undoubtedly been a failure.

Additionally, reducing inflation is the direct cause of the rate hike. The Federal Reserve's target is to maintain U.S. inflation at around 2%. U.S. inflation reached a high of 9.1% last year and has since slowly declined, but not significantly.The current numerical distance from the target is quite far. In March, the U.S. CPI rose by 5% year-on-year, which is a slight decrease from February. However, excluding energy prices, the core U.S. CPI remains high at 5.6%, and it has actually increased by 0.4% month-on-month.

The U.S. has employed various means to suppress international oil prices. In addition to targeting major oil-producing countries such as Russia, Saudi Arabia, and Iran, reducing domestic inflation is also an important reason. However, the fluctuation of crude oil prices is quite large, and the overall decrease in CPI driven by a single price drop also has a certain degree of artificiality.

Therefore, from the above situation, the Federal Reserve's interest rate hikes have not only failed to achieve the expected goals but have also exacerbated the crisis in the U.S. banking industry.

Market data also proves that the Federal Reserve's recent interest rate hikes have not been recognized by the market.

The recent exchange rate of the U.S. dollar shows that the appreciation or depreciation of the dollar is mainly influenced by interest rate levels and market demand.

The Federal Reserve's interest rate hikes are continuously raising the terminal interest rate in the market, hoping for the appreciation of the dollar, thereby reducing inflation. Precisely for this reason, the Federal Reserve has raised interest rates for ten consecutive months, reaching the highest level in nearly forty years, and the unprecedented operation of raising interest rates by 50 basis points four times in a row.

Precisely for this reason, the terminal interest rate of the dollar has become higher and higher, reaching a cap of 5.25%. On the contrary, it has also led to the continuous widening of the interest rate gap between the currencies of other countries and the dollar, causing the dollar to flow back and resulting in significant devaluation of exchange rates in other countries such as Argentina and Brazil. In Argentina, for example, the domestic inflation rate has reached 91%.

The renminbi follows the same logic. Fortunately, our country implements a managed floating exchange rate system, which allows the depreciation of the renminbi to not be as severe as that of other countries.

After the recent announcements of interest rate hikes by the Federal Reserve, the renminbi has not fallen but has risen, which is the market's direct response to the pessimistic outlook for future interest rate hikes.The US Dollar Faces a Backyard Fire

In the face of internal and external challenges, Argentina has decided to use only the Chinese yuan for the settlement of goods imported from China, following Brazil's earlier move to settle in yuan as well.

This is a significant blow to the United States, as both Argentina and Brazil are South American countries, a region often referred to as "the US's backyard," serving as a crucial supplier of agricultural products such as cocoa, soybeans, and corn to the Western world.

It has been a matter of course for South American countries to use the US dollar, but now the two largest economies in South America, ranked by GDP, are using the yuan for trade settlement, abandoning the US dollar. This shift by these two major economies to yuan settlement is of great significance.

As we mentioned earlier, the value of the US dollar is determined by two factors: yield, which is related to interest rates, and demand. Here, the US dollar is akin to a commodity, and when supply cannot meet demand, its value naturally increases.

Over the past year, especially since the outbreak of the Russo-Ukrainian crisis, a series of financial hegemony maneuvers by the United States have led to an intensifying global trend of de-dollarization. The global demand for the US dollar has declined, and emerging countries, led by China, have been continuously reducing their holdings of US Treasury bonds, leading to insufficient demand for the US dollar.

The Federal Reserve has been continuously raising interest rates, yet the US dollar has not appreciated as it used to. This phenomenon also reflects that many countries have reduced their transactions in US dollars, and the depreciation of the US dollar may have already begun.

As the pace of countries reducing their holdings of US Treasury bonds accelerates, in addition to their own currencies, the value of the yuan is becoming increasingly evident.

Recently, there has been a significant piece of good news from Argentina. Argentina has decided to abandon the US dollar settlement and adopt yuan settlement in its trade with China.

In just April, the trade volume between China and Argentina reached 12 billion yuan, with official settlement starting from May 1st. The yuan settlement for China-Argentina trade has significantly shortened the trade circulation cycle, with efficiency potentially more than doubled.Prior to this, Brazilian President Lula visited our country, and at that time, China and Brazil reached an agreement that China-Brazil trade would no longer use the US dollar as an intermediary currency, but would instead conduct trade in Renminbi (RMB).

China is Brazil's largest trading partner, with Brazil's imports from China accounting for 24% of Brazil's total import volume. China is also Brazil's largest export market, with over 30% of Brazil's exports going to the Chinese market.

Previously, trade between China and Brazil was settled in US dollars, which caused many inconveniences for both parties. For instance, settlements were not made in the current period, and the appreciation of the US dollar led to unpredictability in the future and a decrease in profits.

Countries such as Argentina and Brazil, part of the "American backyard," have adopted RMB trade based on their own needs and development, adding new currencies, which also indicates that the influence of the RMB is continuously expanding overseas.

Now, the "American backyard" is on fire, and this fire shows a trend of burning more fiercely. In addition to Brazil and Argentina, the South American country of Chile has also joined the ranks of using RMB for settlement, and the RMB has achieved great success in South America.

On May 3rd, after the Federal Reserve announced a 25 basis point interest rate hike, the RMB not only did not fall but actually rose.

The RMB surged by 700 points.

Amidst the global trend of de-dollarization, the RMB has undoubtedly become the best foreign currency to fill the void left by the US dollar, with foreign capital accelerating its inflow into China.

Before the end of the Federal Reserve's interest rate hike process, the yield on the 10-year US Treasury bonds has been continuously declining since March. In the face of significant risks of an economic recession in the US, the yield on 10-year US Treasury bonds is expected to continue to decline, providing long-term conditions for foreign capital to hold RMB and flow into our country.

Additionally, if the Federal Reserve's interest rate hike cycle is nearing its end, capital will exhibit early unusual movements, quickly triggering more international capital to reflow back to emerging markets represented by China.Under these conditions, the appreciation of the renminbi does not require interest rate hikes to be realized; instead, the robust demand will drive the continuous appreciation of the renminbi. This has led to a situation where, after the recent interest rate hikes by the United States, the renminbi has not fallen but has risen, with the exchange rate surging by nearly 700 pips.

On May 1st, the offshore exchange rate for the US dollar against the renminbi reached a low of 6.96455. After the completion of the Federal Reserve's interest rate hike, the renminbi exchange rate rose to a high of 6.89640, with the maximum increase within three days approaching 700 basis points.

In addition to the reversal on the demand side, China's economic growth, which exceeded expectations, has also provided strong support for the renminbi's upward trend. According to data from the National Bureau of Statistics, China's GDP grew beyond expectations in the first quarter, increasing by 4.5% year-on-year at constant prices. The start of the first quarter was promising, and it should not be a problem to achieve the annual economic growth target of 5%.

By the third quarter, the effects of many of the current stimulus policies will gradually become apparent, and China's economy will move towards a slow recovery.

After the release of China's economic growth figures for the first quarter, foreign institutions also raised their economic growth forecasts for China in 2023, such as JPMorgan Chase and Citibank. JPMorgan Chase even raised its forecast for China's economic growth rate from the previous 6% to 6.4%.

The positive economic outlook in China is not only conducive to promoting the appreciation of the renminbi but also further enhances the international status of the renminbi.

From the three major crises within the United States—economic recession, inflation, and banking crises—to the use of renminbi for trade settlement in South American countries such as Brazil and Argentina, and then to the appreciation of the renminbi, all these factors highlight the stark contrast between China and the United States.

They also foreshadow the rise of the East and the decline of the West, signaling that the era of the United States harvesting the world is coming to an end. Countries are gradually recognizing the nature of the US dollar as an international currency and are reducing or abandoning the use of the US dollar for settlement. With the approach of the US debt ceiling, the uncertainty surrounding the US dollar is also significantly increasing.

We must also clearly recognize that the internationalization of the renminbi is still in its infancy, and we will face more problems and pressures in the future. However, the strength of the renminbi is already unstoppable. As a rising star in the era of multiple currencies, the renminbi can still hold its head high globally.