The European Central Bank cuts interest rates, Canada cuts interest rates, and the global liquidity defense meticulously woven by the Federal Reserve has shown significant loosening. Meanwhile, domestic issues in the United States are rapidly amplifying. How long can the Federal Reserve hold on?

A more significant question is, historically, the United States has experienced multiple economic and financial crises, even the Great Depression. Does the United States truly fear recession?

By June 2024, it had been 2 years and 3 months since the US dollar raised interest rates, and finally, someone could not bear it anymore.

Previously, the European Central Bank had announced that it was fully prepared for a rate cut in June, and the final decision would be made at the interest rate meeting on June 6th.

The latest news indicates that several European economists believe that the European Central Bank will announce a 25 basis point rate cut on June 6th, reducing the deposit facility rate from the current 4.00% to 3.75%.

A few days ago, we published an analysis suggesting that although the European Central Bank has repeatedly stated its intention to cut rates, whether it can withstand pressure from the United States remains uncertain.

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The eurozone interest rate is a more loosely structured collective decision-making mechanism. Europe has currently been infiltrated by Americans like a sieve, so whether the rate cut will proceed as scheduled is still an unknown.

While Europe is still in a dilemma, another important ally of the United States, Canada, has directly announced a rate cut.

On June 5th, the Bank of Canada announced a 25 basis point rate cut, becoming the first central bank among the G7 to initiate an easing cycle.

Both Europe and Canada are no longer tightening, which further elevates the US dollar. So, what will the US dollar do?Some have argued, if the US dollar doesn't cut interest rates, can't others do so? To understand this, one must grasp what the purpose of the US dollar's interest rate hike truly is. In essence, it aims to tighten global liquidity. On one hand, it suppresses inflation, and on the other, it maintains a strong US dollar. This is to correct the previous mistake of indiscriminately printing dollars and to foster a healthy monetary environment.

Simultaneously, by withdrawing dollar liquidity, it reaps global wealth, reduces the vibrancy of international trade, and strikes at major competitors. Therefore, to achieve these effects, the US typically demands that its main allies maintain consistency in monetary policy.

If the US dollar tightens while other currencies loosen, the liquidity gap left by the dollar would be filled by other currencies. Consequently, the US dollar's tightening policy would essentially become a game that the US plays behind closed doors. This means it remains effective domestically within the US, but its impact on the global monetary environment would be significantly diminished.

The most significant currencies among these are the euro, pound sterling, yen, and Canadian dollar; of course, the Chinese yuan is beyond their control. Now, with two of the main four allied currencies defecting first, the US dollar is in a tough spot.

To illustrate with a simple example, a Chinese company building a factory in France might need a loan. With the current scarcity of US dollars and high interest rates, they could opt for a euro loan instead.

By the time the US dollar cuts interest rates and becomes more accommodating, the Chinese company would have already secured its euro loan and would no longer need US dollars. This is what people commonly refer to as the scenario where the US dollar lowers interest rates only to find that the world no longer needs dollars, and they can't get out. In such a case, the US might experience a second round of inflation, while a large amount of dollars accumulate domestically, necessitating the payment of substantial interest costs.This is why the dollar's interest rate cuts are always swift; on one hand, to expedite the reaping of global assets, and on the other hand, to rapidly reduce the cost of hoarding dollars. When interest rates are lowered to zero, there is no cost.

This is the international situation that the dollar faces, and the situation within the United States is even more precarious.

The U.S. inflation rate for April has already dropped below 3%, but the Federal Reserve's senior officials are extremely concerned about a rebound in inflation. Therefore, they repeatedly claim that they need a longer duration of inflation data to support the decision to lower interest rates for the dollar.

Last month, several high-ranking officials of the Federal Reserve made numerous public statements, firmly stating that if the inflation rate does not reach the 2% target, there will be no interest rate cuts this year.

However, on the other hand, multiple data points indicate that the U.S. economy is on the brink of recession and must lower interest rates.

For example, employment data is very pessimistic. The ADP employment data released on June 5 only increased by 152,000 people, significantly lower than the expected 175,000, marking the lowest level in three months. At the same time, the April data was also revised down from 192,000 to 188,000.

Additionally, the annual wage increase has remained around 5% for three consecutive months, which is the lowest level since 2021. The salary increase for employees who switch jobs has also declined for the second consecutive month.

These are direct evidence of employment shifting from previous prosperity to a rapid decline in strength.

The Federal Reserve is hesitant to lower interest rates, partly because the dollar is currently too weak to withstand the impact of a sustained weakening of the dollar due to interest rate cuts.

Currently, the U.S. Dollar Index is falling again, reaching a somewhat dangerous level of around 104, and the international payment share is also around 47%.We have previously mentioned that if a safe interest rate cut is desired, the US Dollar Index must be above 110, and the international payment share must be above 50%. Otherwise, if the US dollar cuts interest rates, it would have to endure a decline of about 10%, and the US dollar could potentially collapse directly.

The collapse of the US dollar we speak of is not that it suddenly disappears, but if the US Dollar Index drops below 90, unless international trade demands it, few people would dare to hold a large amount of US dollars, and there might even be a global panic selling of US dollars.

At the same time, the international payment share could also fall back to a dangerous level below 35%.

Some also argue that if interest rates are cut too quickly, a large-scale capital flight from the US dollar could likely lead to a collapse of the US stock market, a commercial real estate crisis, and a widespread bankruptcy of small and medium-sized banks.

These issues seem somewhat contradictory, such as the possibility of a large-scale exodus of the US dollar, or the inability to escape, which all depends on the Federal Reserve's grasp of the timing and intensity of the interest rate cut, because both sides are crises, so one wrong move, and everything is lost.

The US dollar has never encountered such a complex crisis in history, so the Federal Reserve is now under great pressure, indecisive, and simply lying flat, not making decisions.