Since mid-August 2022, the dollar index has rebounded rapidly and continued to hit a 20-year high. We thinkThere is an important "dark line" behind the recent strengthening of the dollar, which is the rebound in international energy prices.

1. International oil prices rebounded.Brent oil prices broke 100 again on August 23 and closed at $105 a barrel on the 29th. On the one hand, the Iran agreement has not yet landed, and the supply disturbance of OPEC worries the market again; on the other hand, the European energy crisis and rising international natural gas prices have led to a rise in oil prices. British natural gas prices rose above their March high in late August, when oil prices exceeded $120 a barrel.

2. The Federal Reserve releases its eagles again.Mr Powell's speech at Jackson Hole was seen as a correction of loose market expectations. The US CPI inflation rate has always had a strong correlation with the trend of international oil prices, and the rebound in oil prices has made the Fed doubt the sustainability of the slowdown in inflation in July. In addition, there is a good correlation between the international oil price level and the implied inflation expectation of US 10-year TIPS treasury bonds. Powell's latest speech mentioned that historical experience has made the Fed fully aware of the importance of stabilizing inflation expectations.

3. Non-American economy is under pressure. 1) the energy supply of the euro zone has suffered more unexpected disturbances such as the outage of natural gas pipelines and high temperatures in the summer, and the exchange rate of the euro is under further pressure.In late August, Russia announced that the Beixi No. 1 pipeline would be suspended for three days from August 31. In addition, high summer temperatures have escalated the energy crisis in Europe. At this time, a sharp increase in interest rates by the ECB will not only give a limited boost to the euro exchange rate, but may increase economic and financial risks.2) Britain's "stagflation" pressure overtook that of the euro zone, and the depreciation of the pound accelerated.The pound has depreciated faster than the euro since mid-August. Britain's CPI exceeded double digits in July compared with the same month last year. On August 26th, Britain announced that it would raise the energy price ceiling by 80% from October 1, and British energy prices are still likely to rise sharply in the future. Even if the Bank of England has raised interest rates by 1.65 percentage points since December, its progress in curbing inflation has been limited and not enough to appease market fears of "stagflation".3) the exchange rate of the yen is directly affected by the rise in energy prices and the indirect impact of rising interest rates on US debt.First, because Japan is highly dependent on energy imports, the rise in international energy prices directly increases the demand for foreign exchange of Japanese yen against the US dollar; second, the widening spread between US and Japanese government bonds increases the pressure on Japanese capital outflows; moreover, Japanese bond interest rates also rise along with US bond interest rates and return to the control target of the Bank of Japan's yield curve, forcing the central bank to expand bond purchases and the yen money supply is forced to increase. On August 29, 10-year Japanese bond interest rates broke again after nearly two months, and the exchange rate of the yen also depreciated rapidly.

4. The next step of "strong dollar".The fundamental reason for the strengthening exchange rate of the US dollar since the beginning of this year is that the US economy has remained relatively resilient in the energy crisis: on the one hand, the US economy is far less dependent on energy than most developed economies such as Europe and Japan; on the other hand, the US economy is still resilient and the Federal Reserve has more strength to tighten.. In the short term, unless there is a substantial easing in the international "energy crisis", the dollar index may not have "peaked" given the rising energy demand in winter, the impending recession in Europe, and the fragility and tension of non-US financial markets. In the medium term, the "energy crisis" will eventually threaten the outlook of the US economy, and the realization of the risk of a US recession may be the day when the dollar index reaches its peak.

Risk hints: the international geopolitical situation is uncertain, the international energy supply is better than expected, and the US economy is falling faster than expected.