The US Dollar is a Source of Global Instability

The US Dollar is a Source of Global Instability

The US dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions.

So the US dollar’s strength or weakness can have an enormous impact on global markets.

Using the Fed’s broad real trade-weighted dollar index (my favourite foreign exchange metric, much better than DXY), the US dollar hit an all-time high in March 1985 (128.4) and hit an all-time low in July 2011 (80.3).

Right now, the index is 97.95, below the middle of the 35-year range. But what matters most to trading partners and international debtors is not the level but the trend.

The dollar is up 12.5% in the past four years on the Fed’s index, and that’s bad news for emerging-markets (EM) debtors who borrowed in US dollars and now have to dig into dwindling foreign exchange reserves to pay back debts that are much more onerous because of the dollar’s strength.

And EM lending has been proceeding at a record pace.

Actually, the Fed’s broad index understates the problem because it includes the Chinese yuan, where the dollar has been stable, and the euro, where the dollar has weakened until very recently.

When the focus is put on specific EM currencies, the dollar’s appreciation in some cases is 100% or more.



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