Over the past year, it is not only the euro that has depreciated relative to the US dollar. Sterling, yen, Swiss franc and other currencies have shown the same trend. According to Xinhua Financial News, during the North American trading session on July 12, the euro fell 1.5% against the US dollar to 1.0032, just a line away from parity. The last time the euro hit this low against the dollar was in 2002, 20 years ago. This also means that the euro has realized a "reincarnation" from appreciation to depreciation against the US dollar since it officially entered the market. The rise of US dollar interest rate led to the rapid depreciation of the euro The euro was once placed with great hope by the outside world. It was not only considered as a strong driving force to promote economic integration within the EU, but also once considered as the currency most likely to challenge the hegemony of the US dollar. But the reality is that the euro has begun to depreciate continuously after a decade of appreciation since its inception. Over the past decade, the exchange rate of the euro against the US dollar has depreciated by nearly 40% from its peak. On the whole, although the euro once formed the biggest potential challenge to the hegemony of the US dollar in the international capital market, it is still only a potential challenge after 20 years. In the past year, the direct reason for the rapid depreciation of the euro came from the expectation of US dollar interest rate hike. The market expectation of the Federal Reserve to raise interest rates has been strengthened since 2021, and finally became a reality in early 2022. On March 17, the Federal Reserve announced that it would raise the benchmark interest rate by 25 basis points to the range of 0.25% - 0.5%. This is the first time that the Federal Reserve has raised interest rates since December 2018, and it has also opened a cycle of US dollar interest rate hikes. In June, it directly announced a sharp interest rate increase of 75 basis points, raising the target range of the federal funds rate to 1.5% - 1.75%. This is the largest single interest rate hike by the Federal Reserve since 1994. At the same time, the Federal Reserve announced plans to reduce its $8.9 trillion balance sheet. Both interest rate hikes and scale cuts mean that Tianliang dollar will withdraw from the market. This will inevitably lead to a shortage of dollars in the market, causing exchange rate fluctuations to occur in the form of dollar appreciation. Geopolitical upheaval is the main reason If the market does not need the dollar, or needs the euro more, then the Fed's interest rate hike and table contraction do not necessarily mean the appreciation of the dollar and the depreciation of the euro. However, the current exchange rate performance means that the market demand for dollars is still strong, and the demand for euros is relatively weak. The current violent geopolitical turbulence is the main reason for this phenomenon. The conflict between Russia and Ukraine has undermined European countries' expectations of regional strategic stability and a prosperous future. On the one hand, the US dollar, which has strong military protection, has become a more popular safe haven currency in the capital market. On the other hand, Europe's renewed emphasis on defense issues also curbed the expectation of the appreciation of the euro. In the future, European countries will probably increase defense spending accordingly, which greatly increases the market's expectations of the depreciation of the euro. Because if the European Central Bank also raises interest rates, it will greatly increase the borrowing costs of Member States. The unified currency, but not the unified finance, makes the ability of EU Member States to bear the euro interest rate rise vary greatly. Therefore, although inflation in the eurozone is also increasing, the market expectation of the European Central Bank raising interest rates has fallen. The appreciation of the US dollar has brought great challenges to the world In fact, over the past year, it is not only the euro that has depreciated relative to the US dollar. Sterling, yen, Swiss franc and other currencies have shown the same trend, which means that all countries cannot afford the negative effects of interest rate hikes on economic development. At present, not only the depreciation of the euro, but also the appreciation of the dollar has a huge impact on other countries. The first is that the growth of Global trade will be restrained. The appreciation of the US dollar will lead to the decline of the purchasing power of non US dollar currencies, and countries that are highly dependent on Global trade will therefore "become poor", and the development of the global economy will also encounter setbacks. In addition, the appreciation of the US dollar will increase the cost of debt denominated in US dollars, causing countries with us dollar debt to fall into a credit crisis of failing to repay their debts on time. At the same time, the appreciation of the US dollar will cause the global dollar to flow back to the United States, further driving up domestic inflation in other countries. Finally, the appreciation of the US dollar may exacerbate political unrest in some regions. If the Fed continues to raise interest rates at such a radical pace, the development of the global economy will encounter major challenges in the future, and it can be predicted that large-scale political turmoil may occur in many countries. (Xinhua News Agency)