01, The United States' Strategy

In fact, the United States has long been strategizing its influence in Europe. A few years ago, with the instigation of the United States, the United Kingdom successfully exited the European Union, which was a significant blow to the Eurozone itself.

In February and March of last year, the outbreak of conflict in Europe and the Federal Reserve's initiation of interest rate hikes were part of a combined strategy. At that time, this already led to a substantial devaluation of the euro, with a massive outflow of European capital, much of which flowed into the United States.

Prior to the outbreak of the European conflict, the exchange rate of the euro against the US dollar was above 1.14. However, it continuously fell after that, reaching its lowest point in the third quarter of last year, breaking below 0.96.

The panic caused by the European conflict did not last long. To keep the euro depreciating, the United States' method was to continuously raise interest rates, with the increments becoming larger and larger.

The United States began raising interest rates in March, and Europe was forced to start raising rates in July. Moreover, the rate of increase in US interest rates quickly rose to 75 basis points and was maintained at such a high level for four consecutive times. As a result, the interest rate differential between the euro and the US dollar kept widening, which was the reason for the continuous devaluation of the euro.

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02, Euro's Counterattack

Now, as the United States gradually loses its ability to significantly raise interest rates, the Eurozone has taken the opportunity to counterattack.

In early February, the Federal Reserve ultimately decided to raise interest rates by only 25 basis points, but the European Central Bank continued to raise rates by 50 basis points. Do not underestimate the additional 25 basis points; this means that the interest rate gap between the euro and the US dollar has narrowed by 25 basis points.

In fact, the US dollar has been depreciating since November of last year. The reason for the depreciation is that the global market unanimously bears a bearish view on the US dollar and the Federal Reserve's interest rate hikes.The continuous slowdown in the economic growth rate of the United States has led to a decline in GDP on a quarter-over-quarter basis in the first and second quarters, although it still showed a significant year-over-year increase. However, the year-over-year growth rate continued to decline in the third and fourth quarters, with the fourth quarter's growth rate falling to 1.2%. Analysts believe that in 2023, the year-over-year GDP growth rate in the United States may turn negative by 1.5% in the first quarter.

In this scenario, it is hard to envision the Federal Reserve continuing to raise interest rates significantly. Since maintaining the economy through interest rate hikes is no longer viable, the US dollar is naturally expected to depreciate. The market has preemptively shorted the US dollar, leading to an accelerated decline in the US Dollar Index.

Recently, the significant interest rate hikes by the euro relative to the US dollar have added further momentum to the devaluation of the US dollar. A few days ago, the euro-to-US dollar exchange rate had risen to 1.10, almost returning to the level before last year's conflict. At the same time, the US Dollar Index is also approaching the critical threshold of breaking below 100, with the lowest point previously being 100.8, just a stone's throw away.

03, A Pyrrhic Victory

Of course, the United States' strategic moves extend beyond this. In addition to the continuous pressure on the euro to depreciate, the US has also passed multiple bills to attract European businesses to invest in the US.

The Inflation Reduction Act is the most concerning for Europe, prompting several high-level European officials to express their opposition. Under the dual pressures of high inflation and the energy crisis, many European companies are struggling and are considering relocating to the United States. Conveniently, the US is willing to provide these companies with substantial subsidies.

In response to such blatant poaching by the United States, Europe has expressed great indignation. Beyond opposition, Europe is also busily preparing to introduce corresponding subsidies.

What may have surprised Europe is that energy prices began to plummet in the second half of 2022, leading to a decline in Europe's Consumer Price Index (CPI) by the end of the year.Especially the natural gas that was previously as high as 300 euros, has now dropped to below 100 euros, allowing many European companies to breathe a sigh of relief. The United States' undermining efforts have failed.

04, The Federal Reserve's Emergency Pivot

Thus, in the last few days, we have witnessed a significant shift in the stance of the Federal Reserve.

Previously, the Federal Reserve had to successively reduce the magnitude of interest rate hikes, raising rates by 75 basis points in November last year, but then successively lowering the hikes in the following two instances, first to 50 basis points and then to the current 25 basis points.

However, after the eurozone raised interest rates by 50 basis points, the United States sensed the gravity of the situation, with many Federal Reserve officials expressing that the employment data was too good, and inflation might experience a rebound.

In reality, these are all pretexts; the true intention lies in the Federal Reserve wanting to increase the magnitude of interest rate hikes once again.

It seems that the United States has not given up, but the depreciation trend of the US dollar has become irreversible.