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Strong Dollar Causes Global Havoc

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The dollar’s run has few analogues in recent history. Its ascension is a result of the Fed’s relentless rate-hiking (another 75 basis points on Wednesday) and has left a trail of devastation: Increasing food import costs and worsening global poverty; causing a debt crisis and toppling a government in Sri Lanka; and hurting stock and bond investors worldwide.
Some measures put the dollar at an all-time high. It’s gained 15% since mid-2021. With the Fed resolved to keep raising rates to contain inflation — even if it means sinking the US and global economy into recession — currency observers see little to stop the dollar’s rise.

It’s reminiscent of Paul Volcker’s anti-inflation drive in the 1980s. The likelihood of a redux of the Plaza Accord, an accord made to artificially rein in the dollar, is mounting. A similar deal may seem unlikely now, but market indicators imply the dollar could easily jump the same amount again, which would rattle the global financial system and cause extra agony.

“There is no kryptonite to blow up the dollar’s strength soon,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. There is no alternative to the dollar, therefore it’s pummeling economies, other currencies, and corporate profitability.

40% of the $28.5 trillion in yearly global trade is priced in dollars, thus its rapid increase is seen around the world. Its ascent risks establishing a “doom loop.”

Joey Chew, a strategist at HSBC Holdings Plc in Hong Kong, said tightening financial conditions led to increasing recession fears. “There’s no quick fix.”

When global markets go crazy, investors seek a safe haven. The Bank for International Settlements says the US currency provides that security. The US economy’s size and strength are unmatched, Treasuries are one of the safest ways to hold money, and the currency dominates foreign-exchange reserves.

Top dollar indices indicate additional gains. This month’s Bloomberg Dollar Spot Index record is from 2004. The narrower ICE US Dollar Index is below 1980s levels. It would require a 54% rally to reach its 1985 Plaza Accord peak.

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Surging dollar stirs rumors

This time is different, says Wells Fargo Securities’ Brendan McKenna. When the economy cools next year, the Fed should cut rates to ease pressure on the dollar. He said coordinated action to weaken the dollar and promote G-10 currencies is not a priority.

Many of these big economies’ currencies are weak. As investors seek higher rates, the Japanese yen has also fallen to a 24-year low.

Emerging markets have been hit worse. Indian rupee, Chilean peso, and Sri Lankan rupee hit historic lows this year despite central bank efforts to arrest the collapse. Hong Kong’s monetary authority bought local dollars at a record pace to protect the city’s currency peg, while Chile’s central bank intervened $25 billion after the peso fell more than 20% in five weeks.

Pictet Asset Management Ltd. strategist Luca Paolini said it won’t work. Inflation and the American currency are generation-defining phenomena that central banks in emerging nations can’t control.

A strong dollar enhances revenues for energy producers, raw material exporters, and international corporations like Toyota

that earn a lot in the US. It’s a boon for American tourists like Mila Ivanova, 33, from Fresno. Ivanova remarked in London before travelling to Scotland and Ireland that a stronger currency improves her budget.

A dollar hammers most others.

Tech giants that repatriate money to the US have suffered. Microsoft Corp. said the currency was cutting into its profitability, while IBM, which gave Microsoft its first big break during the 1980s inflation, blamed the strong dollar for a cash-flow pressure

Wall Street says don’t dispute the dollar’s dominance right now. A Bank of America Corp. poll shows bullish dollar positions are at a seven-year high.

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“Only when investors are ready to embrace high-risk assets again do we expect the dollar to turn,” said Jane Foley, head of FX strategy at Rabobank.

In 2016 and 2018, as the Fed sought to tighten policy, the dollar strengthened, but with US inflation at a four-decade high, the Fed has less wiggle room. Jerome Powell and Janet Yellen have barely mentioned the dollar’s recent gains.

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