The USD has long been regarded as the most dependable, secure, and stable currency globally, serving as the linchpin of the international financial system. Its dominance is evident in various aspects of global finance, including foreign exchange transactions, international debt securities, cross-border loans, trade invoicing, and SWIFT payments.

However, the currency faced challenges last week as the USD index dipped by over 1 percent, hovering just below 103.00 despite a rise in non-farm payrolls by 275,000 in February. China's economic policies, particularly its currency pegging, export strategy, and trade dynamics, carry significant global implications, impacting both the USD and global liquidity.

China's Economic Policies

Consumer inflation in China has reached 0.7%, the highest in a year, indicating a notable increase in consumer prices alongside a significant decline in producer prices, with January seeing a 0.8% drop, the highest in fourteen years.

While Western central banks are raising interest rates, Asian banks, including the People’s Bank of China (PBOC), are maintaining a more conservative approach. For instance, the PBOC has cut Key Policy Rates three times since 2021, with more reductions expected.

The PBOC has injected liquidity to stabilize the financial market, recently conducting a 10 billion Yuan seven-day reverse repo at an interest rate of 1.8% on March 11, 2024. China aims to boost its economy by 5% in 2024 through increased liquidity.

China's liquidity injections will impact global liquidity, investor confidence, market dynamics, and funding costs. Given China's significant role in regulating the global economy, its liquidity measures directly affect foreign exchange and overall financial stability.

Impact on the US Dollar and Global Liquidity

China's inflation is expected to bolster investor confidence, attracting more capital into the Chinese market and strengthening the Yuan and the Chinese economy. However, it may exert downward pressure on the USD while strengthening itself. Reduced intervention by the PBOC in currency markets could lead to a decline in the USD's value.

China's liquidity injections will drive global demand for oil and commodities, potentially affecting US CPI inflation. Investors seeking higher returns may shift capital to China, impacting USD demand. Overall, the real trade-weighted value of the USD could decrease.

Conclusion

China's economic policies wield significant influence on global finance, with its decisions resonating across borders and affecting currencies, liquidity, and stability. Despite the USD's historical reliability, recent Chinese financial maneuvers have raised concerns. China's contrasting monetary policies play a crucial role globally, impacting investor confidence, market dynamics, and funding costs. The USD faces turbulence due to China's actions, underscoring the enduring importance of China's economic policies in international finance.