On a trade-weighted basis, the US Dollar has charged to its highest level in two decades. The consequences of that surge stretch far beyond the US financial system, and US investors.
Another detrimental side effect of an expensive Dollar is the struggle inflicted upon economic peers – particularly emerging markets – that have borrowed funds via USD. In a recent evaluation of the Dollar’s top world status, the New York Fed reported that the Dollar is the most commonly held denomination among external bank assets to the tune of $16.7 trillion. Foreign interests repaying loans taken out just a year ago will have seen their financing burden rise sharply.
Ironically, the strong Dollar erodes the currency’s safe haven appeal. There is no viable singular alternative , but that only ensures pain will be distributed. Further, when the measures that we rely on for stability become themselves volatile, the entire system is considered even more risky.So what can and will the world—and investors—do about their USD problem? It is unlikely that the world’s authorities will simply ‘hope’ for moderation if the charge continues.
It is worth keeping a close eye on the Dollar’s climb and all efforts to draw attention to the ‘abnormality’ of the move by these authorities as a warning sign that either economic fallout or interventionist action is on the horizon. In more discrete terms,
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