The US dollar credit crisis is coming, and Kazuo Ueda explicitly stated that "the interest rate may be raised again within the year"!

The global foreign exchange market fluctuated violently last week, the US dollar index fell sharply, and non-US currencies generally strengthened. The main drivers are concerns about the US fiscal deficit and debt sustainability, poor performance in U.S. bond auctions, Trump's new round of tariff threats, global trade tensions, and intensive voices from major central bank officials. Risk aversion sentiment has heated up, traditional safe-haven currencies such as the yen and Swiss franc have performed outstandingly, and the euro and the pound have rebounded strongly supported by economic data and policy expectations. The RMB mid-price against the US dollar rose slightly last week, with overall performance stable and market supply and demand basically balanced. In April, the net inflow of cross-border funds, foreign exchange settlement and sales were balanced, and policy easing continued to support market confidence. The State Administration of Foreign Exchange emphasizes stabilizing foreign trade and foreign investment, and continuing to promote facilitation reform and countercyclical adjustments. It is expected that the RMB will maintain steady operation.

Moody's downgraded the U.S. sovereign credit rating, citing a deteriorating fiscal outlook and lack of effective responses to deficit expansion. The move triggered a sharp decline in the US dollar exchange rate and exacerbated volatility in global financial markets.

The US bond auction was bleak, with the 20-year Treasury bond cap rate exceeding 5%, one of the worst performances in five years. The bond market sell-off accelerated, US stocks, US bonds and US dollar fell, and the market's concerns about the gradual decline of "excessive privileges" in the United States have intensified.

Trump tariff threats, the latest statements intensify global trade tensions, investors' confidence in US policy declined, and the US dollar index fell 1.85% weekly, hitting a new low in the stage.

Feders spoke intensively, emphasizing uncertainty in trade policy and inflation risks.It implies that interest rates remain unchanged in the short term, waiting for further clarity in trade and economic data. Minutes of the FOMC meeting showed that policymakers increased uncertainty about the economic outlook, and both inflation and unemployment risks increased.

European Central Bank officials stressed that the degree of dependence on the baseline outlook should not be exceeded, and that the economy and inflation should be prepared to deviate from expectations. The market generally expects to cut interest rates twice this year to deal with the trade shock.

The Bank of Japan keeps policy interest rates unchanged and pays attention to the impact of tariffs on the economy and inflation. President Kazuo Ueda said that if the sense of crisis rises, it may suspend interest rate hikes, emphasizing that the rapid appreciation of the yen is not good for the economy.

The People's Bank of China "double reduction" on May 7, lowering the reverse repurchase rate and deposit reserve ratio. The LPR on the 20th was lowered as scheduled, aiming to stabilize the economy and promote confidence.

Asian market

In 2024, Japan's total external assets soared to a record 533.05T yen, an increase of 12.9% over the previous year. This is the seventh consecutive year of growth, driven by the depreciation of the yen and the ongoing overseas investment activities, especially mergers and acquisitions.

The Japanese government, enterprises and individuals benefited from the monetary effect, with the US dollar and the euro appreciating 11.7% and 5% against the Japanese yen respectively, pushing up the denominated value of the yen held overseas.

Nevertheless, Germany surpassed Japan for the first time in 34 years, with total external assets of 569.65T yen. China followed Japan with 516.28 yen.

While the depreciation of the yen provided valuation support, Japan's status was weakened by Germany's stronger structural current account surplus.

European Market

ECB President Christine Lagarde said in a speech today that the global economic order is "dividing" as multilateralism gives way to bilateral power struggles and protectionism. She stressed that even the dollar's dominance in the global financial system is no longer guaranteed

Lagarde warned that this division poses a serious risk to the security and resilience of Europe. However, she stressed that these challenges could translate into opportunities if Europe takes the right policy response, especially in expanding the “international role” of the euro.

As the second largest and most widely held currency, the euro accounts for about 20% of global foreign exchange reserves, while the US dollar is 58%, so the euro is fully capable of taking on a larger global role.

Doing this will bring tangible benefits: reducing the borrowing costs of EU governments and businesses, reducing vulnerability to foreign exchange volatility, and better resisting external financial coercion or sanctions.

U.S. Market

Minneapolis Fed Chairman Neel Kashkari warned today that the U.S.A major shift in national trade policy has cast a shadow on the monetary policy outlook, making it difficult for the Fed to take action on interest rates before September.

While "everything is possible," Kashkari said in an interview with Bloomberg TV that he was not sure if the situation was "clear enough" by then. He added that it depends largely on whether trade negotiations between the U.S. and its partners reach a specific agreement in the www.avaforexcn.coming months, which could “provide a lot of the clarity we are looking for.”

Kashkali explained that uncertainty is putting pressure on economic activity. He stressed the nature of the stagflation of the tariff shock and pointed out that its impact will depend on the scale and duration of the taxation.

In terms of financial markets, Kashkali acknowledged that rising U.S. Treasury yields may reflect a broader reassessment of the risks of holding U.S. assets worldwide. He believes that the current bond market response may herald a new global model.

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