A look at some areas affected by the greenback’s muscle-flexing
“Our currency, your problem,” were the words of a former U.S. Treasury secretary in 1971 to other finance ministers aghast at the dollar’s surge. More than 50 years on, relentless dollar strength is again leaving a trail of destruction in its wake.
Even the quintessential safe-haven Swiss franc has not been spared, trading near a March 2020 low versus the greenback. But growth concerns may prevent central banks, especially in Europe and Japan, from tightening policy in line with the Federal Reserve. Many reckon that could push the euro down to parity with the dollar, a level unseen since 2002.
The FCI, which factors in the impact of the trade-weighted dollar, shows global conditions are at their tightest since 2009. The FCI has tightened by 104 basis points since April 1. While equity and bond selloffs had a bigger impact, the dollar’s more than 5% rise in this period will have contributed as well.Almost all past emerging market crises were linked to dollar strength. As the dollar rises, developing countries must tighten monetary policy to head off falls in their own currencies.
Investors are increasingly wary. Emerging market currencies are at a Nov. 2020 low, while the premium demanded to hold EM dollar bonds versus Treasuries is up some 100 basis points this yearThe rule of thumb is that a firmer greenback makes dollar-denominated commodities costlier for non-dollar-based consumers, eventually subduing demand and prices.
But as rising U.S. yields and a stronger dollar threaten global growth, commodity prices are starting to suffer. JPMorgan said this week it was reducing exposure to the Chilean peso, Peruvian sol and others to position for “challenging times.”The Fed might welcome a rising greenback that calms imported inflation - Societe Generale estimates a 10% dollar appreciation causes U.S. consumer inflation to decline by 0.5 percentage points over a year.