The start of 2025 has seen turmoil in the global financial markets that caught many analysts by surpriseThe exchange rate of the renminbi, China's currency, has been on a consistent downward trend, plummeting to levels below 7.35, reaching its lowest point in nearly a yearMeanwhile, the US dollar index, even after a rate cut by the Federal Reserve, has displayed an unexpected surge, rising to 109 points.

This situation raises questions about the intertwined fates of different currencies and the underlying mechanics of the financial strategies at playAt first glance, it appears that the US is promoting a loose monetary policy through interest rate cuts, aiming to boost its economyHowever, beneath that surface lies a sophisticated strategy of "financial harvesting," demonstrating a new phase in the US's global economic maneuverings.

The divergence between US monetary policy and the strength of the dollar has left many puzzled

As per conventional economic theory, lowering interest rates typically reduces the attractiveness of a currency, leading to depreciationSo why has the dollar strengthened in this context?

One explanation is the lingering effect of previous high interest rates that made US assets appealing even as the Fed implements rate cutsReports indicate that despite the reductions, the baseline interest rate in the US remains above 5%, providing a strong allure for global capitalThis means that during times of uncertainty, investors prefer the relative safety of the dollar, moving funds away from other currencies, such as the renminbi.

The US has also been proactive in creating risks that disturb global economic stability, such as encouraging Ukraine to halt its natural gas supplies from Russia, exacerbating an energy crisis in the European UnionThis precarious state of affairs has turned the dollar into a safe haven for worldwide capital.

Additionally, the Federal Reserve's interest rate cuts haven’t been fully realized, leading to contradictions between market expectations and real policy effects that have, counterintuitively, boosted the dollar index further

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There is a prevailing consensus in the market that interest rates will remain stable in January, contributing to the strength of the dollar.

On the flip side, while China's economy remains stable, the performance of the renminbi is lackluster against the backdrop of a strengthening dollarThe robust dollar index has exerted upward pressure on global currencies, including the renminbi, which has breached the psychological barrier of 7.35 in offshore marketsThis reflects a broader market trend where investors favor the dollar as a safe bet.

In an effort to kick-start its economy, China has indicated a shift to moderately loose monetary policiesHowever, this has led to market participants opting to buy US Treasury bonds for safety, an action that exemplifies the phenomenon of "voting with their feet," thereby amplifying the pressures on the renminbi.

Concerns about the effectiveness of China's easing policies combined with risks created by US actions have magnified fears of renminbi depreciation

The aim of these monetary policies is to invigorate domestic demand, but they could inadvertently cause short-term capital outflows and fluctuations in the currency's value.

The ostensibly favorable interest rate cuts in the US have concealed a robust dollar surgeThe American strategy of cultivating global uncertainty has successfully pulled in capital, creating sustained pressure on emerging market currencies.

Since the establishment of the Bretton Woods system, the dollar has maintained its core position within the global financial apparatus, operating under two primary mechanisms for "harvesting" economic gains: creating risks to lure capital back and driving up the dollar index while depressing rival currencies.

For instance, fostering geopolitical tensions and economic uncertainties has been a tactic for the USActions like instigating the Ukraine crisis have effectively redirected capital flows toward dollar-denominated assets, leaving other economies, such as those in Europe, struggling under the weight of rising energy costs and currency devaluation.

Regions like Europe are witnessing their currencies floundering in value, pushing the euro precariously close to parity with the dollar, flagging serious weakness in the European economy

The high energy prices combined with depreciation have left Europe grappling with a stagnant inflationary environment.

Asian economies, too, are adjusting their growth forecasts downward, with places like South Korea predicting less than 2% growth for 2025. Emerging markets find themselves under the double burden of capital outflow and sluggish growth, hampering recovery efforts significantly.

To address the strong pressures on the renminbi, revitalizing domestic consumption and investment is essentialHarnessing the internal demand to stimulate the economy could provide China with a strategic advantage amidst global uncertainties.

In pursuit of this goal, plans are underway for 2024 that include massive upgrades to equipment and consumer product exchange programs, aiming to spur consumption significantlyEarly estimates suggest a 7.6% increase in consumer spending compared to the previous year, highlighting the potential to bolster domestic economic support.

Moreover, expanding the use of the renminbi in international settlements can mitigate the pressures of the dollar on the Chinese currency

Notably, during 2024, China has signed numerous agreements with Middle Eastern nations, with over 30% of energy transactions set to occur in renminbi, marking significant progress toward the internationalization of the currency.

Enhancing the structure of capital markets to attract long-term investors can reduce the immediate effects of short-term capital movements on currency stabilityFurthermore, opening the bond market wider to foreign investment can alleviate the outflows and strengthen the renminbi's international standing.

As the US faces slowing economic growth and mounting debt challenges, the enduring strength of the dollar may come under pressureIf the Federal Reserve shifts towards a more accommodating monetary policy in the future, the dollar index may experience a significant declineWith strengthened domestic economic cycles, the renminbi's exchange rate can become more stable over time amidst fluctuations.

In the longer term, the ongoing process of renminbi internationalization will likely enhance its place within the global currency landscape