However, some countries or regions, such as Thailand, China and Hongkong, adopt a fixed exchange rate for the US dollar. Once the Thai baht depreciates against the US dollar in the foreign exchange market, the central bank there will sell the US dollar as an asset item in the balance sheet in the foreign exchange market and replace it with Thai baht, thus pushing the exchange rate of the local currency against the US dollar back to the preset exchange rate.
The result of this is "shrinking the table" and the Thai baht is returned.
In addition, since we all know that the central bank there will definitely keep the exchange rate against the US dollar unchanged, we borrow Thai baht in the Thai interest rate market, change it into US dollars, and then lend US dollars in the US interest rate market to continuously earn spreads. Or sell Thai baht bonds, buy US dollar bonds for US dollars, or even short Thai baht bonds through futures or securities lending.
The inevitable result of this is to push up the market interest rate in Thailand, because the bonds with Thai baht as the target will be pushed down and the interest rate in the interbank lending market will be pushed up.
-Soros used this to hedge Thailand's interest rate and foreign exchange market, which eventually led to the collapse of the Thai baht. The Thai government announced that it would abandon the fixed exchange rate system of the Thai baht against the US dollar. I talked about the specific process in detail in the second article at the end of the article.
This means that if the exchange rate is to be independent, then the market interest rate must be independent and can only passively follow the Fed's monetary policy.
In other countries, the currency does not adopt a fixed exchange rate against the US dollar, and the mortgage-backed assets issued in local currency are not US dollars, such as Japanese yen, British pound and euro. They have an independent currency issuance system and are not dependent on the US dollar. Then why is it also "harvested" by the dollar?
Because as long as the capital market is open, when the Fed raises interest rates or cuts interest rates, there will inevitably be a large number of institutions or funds to earn spreads through the above methods. The result is either that the interest rate fluctuates with the American interest rate, or that the exchange rate appreciates or depreciates.
In other words, at least one of the two major markets (interest rate market and exchange rate market) in other countries is controlled by the Federal Reserve.
-This is the famous Mundell's theory of impossible trinity. On the premise of free capital flow, it is impossible for the state to guarantee interest rate autonomy and exchange rate autonomy at the same time.
Hedge funds and investment banks on Wall Street also colluded with the Fed. In the quantitative easing cycle of the Federal Reserve (also known as the interest rate reduction cycle), they buy a large number of assets or securities from other countries to speculate on their prices, and sell them in the forward market to hedge and lock in profits.
Or short the bond market of other countries at a high level, and short the exchange rate of the local currency against the US dollar at a high level. Then the fed entered the interest rate hike cycle. According to the above analysis, the Fed's interest rate hike cycle will lead to the decline of bond prices in other countries, the increase of market interest rates, or the depreciation of foreign currencies against the US dollar. In this case, hedge funds and investment banks on Wall Street make money in at least one of the two markets. In the worst case, the other market does not make money or lose money, and even in most cases, both markets make money at the same time.