A Major Turning Point in the Global Economic Landscape: Trade Policies, Capital Flows, and Turbulence in the Bond Market

Recently, the sudden introduction of a significant trade policy has caused upheaval in the global financial markets. This policy aims to adjust the long-standing trade imbalances, but its impact goes far beyond that. It could reshape the trade structure of the United States and international capital flows, while also presenting new challenges to the U.S. Treasury market.

The core impact of this policy is reflected in the following aspects:

1. Trade Structure Adjustment: The new policy attempts to reduce imports and encourage domestic production by increasing tariffs, thereby narrowing the trade deficit. However, this approach may bring a series of side effects, such as rising import costs leading to increased inflationary pressure, as well as potential retaliatory tariffs from other countries. Although trade imbalances may be temporarily alleviated, the pain of supply chain restructuring and rising prices is difficult to avoid.

2. Changes in international capital flows: As U.S. imports decrease, the dollars flowing overseas will also diminish. This may trigger concerns about a "dollar shortage" globally. The dollar reserves held by overseas trade partners will decrease, and emerging markets may face liquidity tightening. During periods of dollar scarcity, funds often flow back to the U.S. or towards safe-haven assets, impacting the stability of overseas asset prices and exchange rates.

3. Pressure on the U.S. Treasury Market: For a long time, the massive trade deficit of the U.S. has resulted in overseas holders possessing large amounts of U.S. dollars, which typically flow back to the U.S. through the purchase of U.S. Treasuries. New policies may compress the outflow of dollars, leading to a decline in the ability of foreign investors to purchase U.S. Treasuries. However, the U.S. fiscal deficit remains high, and the supply of Treasuries continues to increase. If external demand weakens, who will buy the ever-increasing U.S. Treasuries? This could lead to rising yields on U.S. Treasuries, increased financing costs, and even the risk of liquidity shortages.

Overall, this policy may have a "drinking poison to quench thirst" effect on a macro level: it might improve trade imbalances in the short term, but it could also weaken the dollar's circulation power globally. This adjustment of the balance sheet is essentially shifting pressure from the trade account to the capital account, with the U.S. Treasury market being the first to feel the impact. A blockage in macro funding flows is likely to explode elsewhere.

Dollar Liquidity Crisis and Shift in Monetary Policy

In the face of a tightening situation due to reduced trade affecting the supply of dollars overseas, U.S. monetary authorities may have to take action to alleviate dollar liquidity pressures. When foreign entities find it difficult to purchase U.S. Treasury bonds due to a shortage of dollars, domestic central banks and the banking system in the U.S. may need to fill this gap. This means the U.S. may need to restart its monetary easing policy.

In fact, the Federal Reserve Chairman has recently hinted at the possibility of quickly restarting quantitative easing (QE) and focusing on purchasing U.S. Treasury bonds. This indicates that officials are also aware that maintaining stability in the Treasury bond market may require additional dollar liquidity injection. In short, the issue of dollar scarcity may need to be resolved through "massive monetary easing." The Federal Reserve's expansion of its balance sheet, lowering interest rates, and even involving the banking system to jointly purchase bonds are all measures that may be forthcoming.

However, this liquidity rescue measure faces a dilemma:

1. Timely injection of US dollar liquidity can stabilize government bond yields and alleviate the risk of market failures.
2. However, large-scale monetary easing may ultimately trigger inflation, weakening the purchasing power of the dollar.

The supply of US dollars has shifted abruptly from tightening to flooding, and the value of the dollar will inevitably experience severe fluctuations. It is foreseeable that in this "first draining, then releasing" roller coaster market, the global financial market will undergo a dramatic swing from a strong dollar to a weak dollar. The Federal Reserve will have to seek a balance between stabilizing the bond market and controlling inflation, but it seems that ensuring the stability of the treasury market is the top priority at the moment, and "printing money to buy bonds" has seemingly become a politically necessary choice. This also indicates that the global environment of dollar liquidity is about to undergo a significant turning point: returning from tightening to easing. Historical experience shows that once the Federal Reserve opens the floodgates, liquidity will eventually spread to various market sectors, including the risk asset market.

The Impact of Bitcoin and Crypto Assets: Inflation Hedge and the Rise of "Digital Gold"

The Federal Reserve's signal to restart monetary easing could be good news for cryptocurrencies like Bitcoin. The reason is simple: when the dollar is flooding the market and expectations of fiat currency depreciation rise, rational capital seeks out inflation-resistant assets, and Bitcoin is being highlighted as "digital gold". The limited supply of Bitcoin becomes more attractive in this macro context, and its value support logic becomes clearer: when fiat currency continues to depreciate, the value of hard currency assets tends to increase.

The price movement of Bitcoin largely depends on the market's expectations of future fiat currency supply. When investors anticipate a significant expansion of the dollar supply and a decrease in the purchasing power of paper money, safe-haven funds are likely to flow into assets like Bitcoin that cannot be over-issued. Looking back at the situation in 2020, the synchronized rise in the prices of Bitcoin and gold after the Federal Reserve's massive QE is clear evidence. If a new round of easing policies is initiated, the cryptocurrency market is likely to replay this scenario: digital assets may usher in a new wave of valuation increases.

In addition to expectations of rising prices, this round of macro changes may also reinforce Bitcoin's positioning as "digital gold." If the Federal Reserve's easing measures lead to a lack of trust in the fiat currency system, the public may be more inclined to view Bitcoin as a means of storing value against inflation and policy risks, much like how people embraced physical gold during turbulent times in the past. It is worth noting that insiders in the cryptocurrency circle have long been accustomed to short-term policy noise. In fact, the original intention of Bitcoin's creation was to combat currency debasement and policy uncertainty; every instance of monetary expansion and policy misstep further underscores the value of holding Bitcoin as an alternative asset hedge. It is foreseeable that as expectations for dollar expansion heat up and safe-haven funds increase their allocation, Bitcoin's image as "digital gold" may become more deeply ingrained in the minds of the public and institutional investors.

Potential Impact on the DeFi and Stablecoin Markets

The significant fluctuations of the US dollar not only affect Bitcoin but also have far-reaching impacts on stablecoins and the decentralized finance (DeFi) sector. As a substitute for the dollar in the crypto market, the demand for stablecoins will directly reflect changes in investors' expectations regarding dollar liquidity. Furthermore, on-chain lending rate curves may also vary with the macro environment.

1. Demand for Stablecoins: During periods of dollar scarcity, offshore markets often use stablecoins to alleviate pressure. When it is difficult to obtain dollars overseas, stablecoins may trade at a premium in the over-the-counter market, reflecting the demand for digital dollars. Once the Federal Reserve engages in large-scale monetary easing, the newly minted dollars may partially flow into the cryptocurrency market, driving a large-scale issuance of stablecoins to meet trading and hedging needs. The issuance of stablecoins in recent months has already shown that this trend is forming. Regardless of whether the dollar strengthens or weakens, the rigid demand for stablecoins may only increase: either due to a lack of dollars seeking alternatives or due to concerns over the depreciation of fiat currency, leading to a temporary shift of funds onto the blockchain for hedging. Especially in emerging markets and regions with strict regulations, stablecoins play the role of a dollar substitute, and every fluctuation in the dollar system actually strengthens the position of stablecoins as "crypto dollars." If the dollar enters a new round of depreciation, investors may rely more on stablecoins for trading in the cryptocurrency market to protect their assets, thereby pushing the market value of stablecoins to new highs.

2. DeFi Yield Curve: The tightness of US dollar liquidity will also transmit to the DeFi lending market through interest rates. During periods of dollar shortages, on-chain dollars become precious, and the interest rates for lending stablecoins may rise accordingly, making the DeFi yield curve steeper (lenders demand higher returns). Conversely, when the Federal Reserve eases liquidity resulting in abundant market dollars and a decline in traditional interest rates, stablecoin interest rates in DeFi may become relatively more attractive, thereby attracting more funds into the blockchain for yield. Analysis reports indicate that, under the expectation that the Federal Reserve may enter a rate-cutting cycle, DeFi yields have started to regain attractiveness, with the stablecoin market size rebounding to approximately $178 billion, and the number of active wallets stabilizing above 30 million, showing signs of recovery. As interest rates decline, more funds may shift toward blockchain in search of higher yields, further accelerating this trend. Some analysts even predict that with the growth of crypto credit demand, the annualized yield of stablecoins in DeFi is expected to rebound to over 5%, surpassing the returns of US money market funds. This means that DeFi may offer relatively better yields in a low-interest-rate macro environment, thereby attracting the attention of traditional capital.

However, it is important to note that if the Federal Reserve's easing ultimately leads to an increase in inflation expectations, stablecoin lending rates may also rise again to reflect the risk premium. Therefore, the yield curve in DeFi may experience "first down and then up" fluctuations: initially flattening due to ample liquidity, and then steepening under inflationary pressure. Overall, as long as dollar liquidity remains abundant, the trend of large capital flowing into DeFi in search of returns may be difficult to reverse, which will push up the prices of quality assets and lower the risk-free interest rate level, causing the entire yield curve to shift in favor of borrowers.

In summary, the macro chain reaction triggered by the latest trade policies will profoundly impact all aspects of the cryptocurrency market. From macroeconomics to dollar liquidity, and then to Bitcoin trends and the DeFi ecosystem, we are witnessing a butterfly effect: changes in trade policies lead to currency turmoil, and as the dollar fluctuates sharply, Bitcoin is poised for a surge, while stablecoins and DeFi encounter both opportunities and challenges in this changing landscape. For astute crypto investors, this macro storm represents both risk and opportunity. As the cryptocurrency community often says: "The day the central bank prints money is the day Bitcoin rises." Objectively, aggressive trade policies may accelerate this process. Although there remains uncertainty in current predictions, this seems to be the most positive and clear development outlook at present.