Global liquidity conditions have now reached a tightening phase. The inflation triggered by the Middle East geopolitical conflict has become the driving force for the shift in monetary policy by central banks worldwide. Under the pressure of imported inflation from geopolitical factors, renewed tightening policies from Europe and Japan have already been implemented, and the restart of interest rate hikes by the United States has also become a mainstream market expectation. This likely signals the formal end of the period of global liquidity easing.
The CFR Global Monetary Policy Tracker Index covers 54 economies globally, measuring the overall monetary policy stance using a weighted methodology. According to this index, central banks in many countries are marginally tightening liquidity. In the second quarter of this year, the global monetary policy tracker index has slightly broken below zero, entering the tightening zone.
During past U.S. rate hike periods, the U.S. dollar index has rarely entered a sustained one-way trend. Reviewing recent Federal Reserve rate hike cycles, it is observed that during these cycles, the dollar index seldom enters a persistent one-way trend, often falling into a range-bound pattern. Only the unexpected, preemptive rate hikes of 1994-1995 led the dollar index into a one-way downtrend. In the subsequent three rate hike periods, the dollar index tended to be range-bound. From 2004 to 2006, the dollar index entered an inverted N-shaped fluctuation; from 2015 to 2018, it entered an inverted W-shaped fluctuation; and from 2022 to 2023, under aggressive rate hikes, the dollar index first rose, then peaked and declined.
The U.S. Dollar Index May Enter a Phase of Wide Fluctuations in the Second Half
The current tightening expectations primarily stem from the impact of escalating geopolitical conflicts on inflation. Compared to February, before the conflict occurred, the year-on-year PCE has increased by 1.2 percentage points, with over 80% of this rebound contributed by energy. However, this strong tightening momentum may now be easing. The situation in the Middle East has shown substantial marginal de-escalation, with oil prices falling back close to pre-U.S.-Iran conflict levels. If the inflationary pressure from geopolitical conflicts is expected to ease accordingly, it is believed that the Federal Reserve's motivation to raise interest rates may weaken, and rate hikes could be further delayed. In the second half of the year, the dollar index is highly likely to enter a phase of wide fluctuations around a shifting central level, as the geopolitical tide recedes.
Risk factors include global monetary policy exceeding expectations and geopolitical conflicts escalating beyond expectations.
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