LONDON- “Our currency, your problem,” were the words of a former US 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.
The US currency vaulted to two-decade highs this week, and its strength is tightening financial conditions just as the world economy confronts the prospect of a slowdown.
The surge threatens “to damage the broader market environment and expose the economic and financial cracks in the system,” said SamyChaar, chief economist at Lombard Odier.
The 8 percent gain in the dollar index this year may not reverse in the near future.
Safe-haven appeal for the greenback is intact, with a dollar financing stress indicator from Barclays near its highest level in seven years. And analysis of past peak-to-trough ranges implies the dollar index could rise another 2 percent to 3 percent, Barclays said.
The dollar’s latest bout of strength has hit other G10 currencies, from the British pound to the New Zealand dollar, as well as those from developing countries that have big balance of payments deficits.
Even the quintessential safe-haven Swiss franc has not been spared, trading near a March 2020 low versus the greenback.
While currency weakness normally benefits export-reliant Europe and Japan, the equation may not hold when inflation is high and rising, as imported food and fuel become costlier as do companies’ input costs.
Euro zone inflation hit a record 7.5 percent this month and Japanese lawmakers are fretting that the yen, at 20-year lows, will inflict damage on households. Half of Japanese firms expect higher costs to hurt earnings, a survey found.
