Yen Plummets While Ruble Rises

The Federal Reserve's continuous interest rate hikes, while publicly claiming to combat inflation, have inadvertently caused the devaluation of many countries' exchange rates, leading to capital outflows. For the United States, this presents an opportunity for reshuffling the deck.

In a certain sense, this is a silent currency war.

In this war, the Japanese yen has significantly depreciated, but the Russian ruble has emerged as a dark horse. Will the United States win?

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This year, the currencies of many countries around the world have entered a depreciation mode.

In March of this year, the pace of the Federal Reserve's interest rate hikes accelerated. The Federal Reserve's regular meeting increased interest rates by 50 basis points as expected, the Bank of England even took the lead over the Federal Reserve, having already carried out four interest rate hikes, and the Reserve Bank of Australia raised the cash rate by 25 basis points to 0.35%.

Due to the dollar's hedging effect against the global interest rate hike wave, funds seeking to avoid risks have been flowing into the dollar. Last week, the US dollar index closed up 1.02%, hitting a new high since December 2002, and at its highest point, it exceeded 105, setting a nearly 20-year high.

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On May 12th, the euro fell to its lowest level since January 2017, and the exchange rate of the British pound against the US dollar also plummeted. Since the end of April, the Chinese yuan has also entered a rapid decline mode. On May 13th, the offshore yuan against the US dollar fell below the 6.83 threshold, the lowest value since September 2020.

However, the most severe is the Japanese yen, with the yen's exchange rate falling to the lowest in 20 years — a level of 1 US dollar to 130 yen.

The speed of the yen's depreciation is faster than the appreciation of the US dollar index. Since the beginning of this year, the US dollar and the Japanese yen have been appreciating and depreciating, respectively, with indices of 8.9% and 30%.Moreover, the depreciation of the Japanese yen has been more rapid compared to several other major currencies, primarily due to the low interest rates of the yen, the ongoing loose monetary policy, the influence of U.S. policies, and the impact of Japan's import and export trade structure.

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Japan is a resource-scarce country, relying on imports for many of its resources.

As the yen depreciates, the global commodity prices have surged significantly since last year, increasing the risk of imported inflation for Japan. The country's inflation rate has also risen to over 2%, a rare occurrence, causing severe negative impacts on Japan's domestic economy.

Japan was once the world's largest trade surplus nation, but now it has experienced a trade deficit, with imports surpassing exports as the leading indicator.

Depreciation, which is beneficial for exports, does not offer significant advantages to Japan, which primarily relies on imports. Japan's high dependency on foreign energy and other bulk industrial raw materials will not only worsen domestic consumer spending but also further expand the trade deficit and deteriorate the current account balance in the context of sustained high global energy prices. The yen's exchange rate falls into a vicious cycle of depreciation.

Of course, depreciation might be a consequence of the Bank of Japan's laissez-faire approach.

In 2022, Japan's current account may record a deficit for the first time in 42 years. If the issues of depreciation and rising prices persist, the deficit could reach 16 trillion yen. With the U.S. continuing to raise interest rates, it is estimated that the yen will continue to depreciate to 140 in the future.

Perhaps Japan needs to devalue to stimulate exports, but in this situation, it undoubtedly provides the U.S. with an excellent opportunity to capitalize.The US dollar has launched an offensive against the Russian ruble, but the outcome is likely to be quite unexpected.

When the conflict in Europe erupted, the dollar rose to 154.25 against the Russian ruble, causing a significant devaluation of the ruble. However, who could have imagined that the exchange rate has now dropped to 64.5, and even as low as 61.725 a few days ago.

The US undoubtedly hoped to suppress the Russian economy by attacking the ruble exchange rate. However, after Russia demanded settlement in rubles for natural gas and locked the gold exchange rate with the ruble, the ruble has turned the tide.

Now the ruble has appreciated significantly, even surpassing its pre-conflict level.

The US has already lost this war.