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Monday, March 16, 2015

And You Thought a Strong Dollar was Good

Over the last year it has been interesting to watch the US dollar confound most everyone. The conventional wisdom was that all the monetary easing by the US Fed would cause the dollar to take a sharp dive in value. Instead, just the opposite has happened. But now we learn that the dollar is getting too strong. Below are links to articles that explain the problems. The question remains. What is the Fed going to do about this? Raising rates will make the problem worse.

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UK Telegraph - Global Finance Faces $9 Trillion Dollar Stress Test as Dollar Soars

Sitting on the desks of central bank governors and regulators across the world is a scholarly report that spells out the vertiginous scale of global debt in US dollars, and gently hints at the horrors in store as the US Federal Reserve turns off the liquidity spigot.
"This dry paper is the talk of the hedge fund village in Mayfair, and the stuff of nightmares for those in Singapore or Hong Kong already caught on the wrong side of the biggest currency margin call in financial history. "Everybody is reading it," said one ex-veteran from the New York Fed.
The report - "Global dollar credit: links to US monetary policy and leverage" - was first published by the Bank for International Settlements in January, but its biting relevance is growing by the day.
It shows how the Fed's zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences.
This abundance enticed Asian and Latin American companies to borrow like never before in dollars - at real rates near 1pc - storing up a reckoning for the day when the US monetary cycle should turn, as it is now doing with a vengeance.
Contrary to popular belief, the world is today more dollarized than ever before. Foreigners have borrowed $9 trillion in US currency outside American jurisdiction, and therefore without the protection of a lender-of-last-resort able to issue unlimited dollars in extremis. This is up from $2 trillion in 2000.
The emerging market share - mostly Asian - has doubled to $4.5 trillion since the Lehman crisis, including camouflaged lending through banks registered in London, Zurich or the Cayman Islands.
The result is that the world credit system is acutely sensitive to any shift by the Fed. "Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans," said the BIS."   . . . . . . .  
. . . . ."Actually, the strong dollar is bad for America. In an immediate sense, it will weaken our long-delayed economic recovery by widening the trade deficit. In a deeper sense, the message from the dollar’s surge is that we’re less insulated than many thought from problems overseas. In particular, you should think of the strong dollar/weak euro combination as the way Europe exports its troubles to the rest of the world, America very much included."
"The surging value of the U.S. dollar promises new bargains for American consumers and travelers but also presents big threats to the U.S. economy — in a trend that is shaping up to be one of the most unexpected and significant factors driving the global economy this year."
"The stronger U.S. dollar has hurt exporters and could dampen their investment plans for next year, top business executives said in a new survey.
The quarterly Duke University/CFO Magazine Global Business Outlook Survey, released Wednesday, polled about 1,000 business executives–mostly CFOs–around the world.
Two out of three bie big U.S. exporters–those with at least one-fourth of their total sales overseas–said the appreciation of the dollar has had a negative impact on their businesses. And nearly one-fourth of big exporters said they have reduced their capital spending plans as a result."
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My added comments:
Thought question for the day: If the US Fed has been trying to get 2% inflation by weakening the US dollar a little bit, is their policy succeeding or failing?
Normally a strong dollar would be viewed as a good thing. But now we have a US dollar moving up in a parabolic fashion sending other currencies around the world crashing downwards. This kind of volatility indicates instability and is not welcomed around the world. Always keep in mind that there are trillions of dollars in derivatives tied to these currency movements which are based on the assumption that things will stay fairly stable and trade in normal ranges. So now we have currencies and oil trading far out of normal ranges. If the Fed raises interest rates, the volatility likely increases. This is why we now see so many calling on the Fed to hold off on raising rates. What will they do? We'll see.

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