The financial world is currently witnessing a profound and powerful shift as the U.Sdollar asserts itself with an unparalleled strength, reminiscent of dynamics not seen in decadesThe ongoing currency exchange turmoil embodies a scenario that might signal the end of a 13-year bull market in global assets, as investors grapple with the implications of rising interest rates and shifting economic paradigms.

Recent data reveals that as of September 7, the U.Sdollar index soared to a peak of 110.786, a remarkable increase of over 24% compared to the beginning of last yearThe consequences of this development ripple across economies — while existing American assets enjoy a boost in value, the rising cost of labor elsewhere becomes a burdenThis scenario emerges from the Federal Reserve's commitment to tackling long-term inflation, highlighting a troubling trade-off: prioritizing inflation control at the potential expense of short-term economic stability

Projections indicate an 80% likelihood that the Fed will instigate a 75 basis point hike in interest rates this September, according to the CME Group's FedWatch tool.

Experts from the Richmond Fed, including President Thomas Barkin, assert the necessity of tighter monetary policies until real interest rates surpass zero, which are calculated by subtracting inflation from nominal ratesWith consumer expectations for next year’s inflation set at 6.2%, this could prompt the Fed to elevate nominal benchmark rates beyond this threshold, conjuring memories of the infamous Volcker era of the 1980s, a period characterized by severe credit tightening.

In June 1981, Paul Volcker, then-chairman of the Federal Reserve, masterminded a dramatic increase in interest rates to a staggering 19.1%. The peak of real interest rates reached 10.87% by September of the same yearDespite such extreme measures, the stock market rebounded after reaching its nadir

• Apple's Electric Vehicle Project Comes to a Halt
• Fed Likely to Hike Rates by 75 bps in September
• NASDAQ Suffers Five Consecutive Losses
• Profit Strategies in Individual Stock Options
• Fed to Halt Rate Increases at 4%

The S&P 500 index hit a depressed P/E ratio of just 6.85 in March 1980, only to subsequently experience annual gains of 25.77%, -9.73%, 14.76%, 17.27%, and 1.4% from 1980 to 1984, a testament to the long-term value of equities in combatting inflation.

Despite hitting the highest interest rates of 1981 in June, the S&P 500 did not find its true market bottom until August 9 of the following year, reflecting a maximum decline of 24.7% from the June peak and 28% during the bear market from 1980 to 1982. It was not until a significant adjustment period, lasting 14 months, that the stock market completed its downtrend following formidable interest rate hikesAnalysts at Goldman Sachs have suggested that the Federal Reserve's current approach to interest rate increases may be even steeper than in the past, with projections of 75 and 50 basis point hikes in September and November, respectively, potentially pushing rates between 3.75% and 4% by year’s end.

As the global financial landscape shifts, a prevailing sentiment surrounds the stark increase in risk aversion amongst investors

The significant rally of the dollar may challenge historical peaks, notably the highs of 121 back in July 2001, a period marked by the burst of the internet bubble, and the astonishing level of 164 reached in February 1985. The escalation in the dollar index signifies an overwhelming sense of caution, highlighting a unified drop across stocks, bonds, and currencies, indicating a rebound of the "cash is king" mentality among investors.

In the context of a global 13-year bull market, during which central banks around the world engaged in aggressive monetary easing, the current phase of competitive devaluation presents a new perilData from investment firms indicates that the MSCI All Country World Index, which saw a significant increase from a trough of 171.7 in March 2009 to a peak of 761.2 earlier this year, has now dropped over 20% since its highThis shift illustrates a transition from a bullish sentiment to a bear market, as investors recalibrate expectations and reassess risk across asset classes.

Bond and foreign exchange markets are experiencing even sharper declines

The Bloomberg Global Aggregate Total Return Index, which evaluates government and investment-grade corporate debt, has also dropped approximately 20% from its peak last yearComparatively, major reserve currencies like the euro, yen, and pound have faced unprecedented depreciations against the dollarFor instance, the euro has depreciated by nearly 19.65%, reflecting dire investor sentiment towards European economic stability and the long-term value of its currency, a view echoed by Nobel laureate economist Paul Krugman.

Adding to the global financial strain, the European Central Bank (ECB) recently announced a 75 basis point increase, bringing its refinancing rate to 1.25%. The forecast predicts a stagnation of the European economy over the next few quarters, along with average inflation rates projected at 8.1% and 5.5% for this year and nextAs enterprises grapple with heightened borrowing costs due to accelerated rate hikes, significant losses have sweeping implications for the European stock markets, as evident from the 25% decline of the Dow Jones Europe Index since its peak earlier this year.

In light of looming inflationary fears, the situation in Hong Kong is equally concerning

The linkage of the local currency to the U.Sdollar underpins a delicate economic balance, directly influenced by the Fed's monetary policiesAs Hong Kong's Monetary Authority closely mirrors U.Srate changes, local stocks face added pressure from capital flight and liquidity concernsWith a median premium rate of 101.6% for H-shares compared to their A-share counterparts, Hong Kong's market risks slipping further amidst tightened global monetary conditions.

By the end of July, over 1400 mainland companies had engaged in listings on the Hong Kong Stock Exchange, accounting for over 50% of the total number of listed firms and nearly 80% of total market capitalization, further amplifying the mainland’s influence on the Hong Kong marketThe PBoC's recent decision to lower the foreign exchange deposit reserve ratio from 8% to 6%, beginning on September 15, is a strategic maneuver aimed at stabilizing the local currency, thereby preventing an uncontrollable decline against major currencies during this tumultuous period of global inflation.

As we move forward, investors will need to navigate this challenging economic landscape with caution