The irresistible rise of the dollar raises fears of the collapse of other currencies
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The irresistible rise of the dollar raises fears of the collapse of other currencies

The strength of the US currency, buoyed by higher Fed rates and a strong economy, is raising fears of currency failure and a major crisis, like the world hasn’t seen since the Asian episode of 1997.

The astonishing rise of the US dollar, which goes from a record level to a record against many currencies, raises fears of a currency failure and a major crisis, like the world has not known since the Asian episode of 1997. Due to the sudden rise in interest rates by the US Central Bank (Fed) And an active economy, the US currency has pushed the British pound, the Indian rupee, the Egyptian pound, or the South Korean won into unknown depths.

“It is clear that the movements are extreme”summarized by Brad Bechtel, from Jefferies. The dollar can go much further than that. So we could end up in a catastrophic situation. for some currencies. Le volontarisme de la plupart des banques centrales engagees, comme la Fed, dans un durcissement monétaire n’y a pas fait grand-chose jusqu’à présent, pas plus que l’intervention directe du Japon sur le marché des changes pour soutenir le last week.

Many fear that the same could be said of the intervention of the Bank of England, whose announcement on Wednesday of a British bond purchase gave wings to the pound. “We have some doubts that the BoE’s plan is the ultimate solution to the anxiety that is putting the British pound and the UK bond market under pressure.”Patrick O’Hare, of Briefing.com, commented.

There is tremendous pressure on the financial system at the moment and it is only a matter of time before a major crisis occurs elsewhere in the world. »

Adam Button from ForexLive

If the UK is in bad shape, others are in bad shape within emerging countries. The Pakistani rupee lost 29% of its value in one year against the “dollar” one of the nicknames of the dollar, and the Egyptian pound 20%. Pakistan, Egypt, Sri Lanka, Bangladesh “They are all suffering from a lack of liquidity worldwide.”Win Thin, of BBH Investor Services, notes. The high prices of oil and grain, which are its main importers, have increased their trade deficit and increased inflation, two factors that are toxic to their currencies. The appreciation of the dollar has exacerbated this phenomenon because many raw materials are denominated in this currency.

“Those countries with weaker fundamentals are likely to be the first to be tested.” In the event that the foreign exchange market overheats further, expect Win Thin. Already fragile, Pakistan also suffered historic floods in August, which prompted the government to discuss restructuring its debt. “There is tremendous pressure on the financial system at the moment and it is only a matter of time before a major crisis occurs elsewhere in the world.”warns Adam Button of ForexLive.

The Japanese yen and the Chinese yuan also fell

As for Taiwan, Thailand or South Korea, all of which are also highly dependent on energy, China’s zero-coronavirus policy has reduced its exports to this important trading partner, and the global economic slowdown threatens all of its trade. If the size of their economies gives them a higher base than their neighbors, in recent weeks China and Japan have contributed to the turmoil in the foreign exchange market. Thus, the Japanese yen and the Chinese yuan have recently fallen to their lowest levels for 24 and 14 years, respectively.

Fear of destabilization brings back memories of the 1997 Asian crisis, triggered by the devaluation of the Thai baht. Malaysia, the Philippines and Indonesia followed, panicking foreign investors and leading to mass withdrawals, to the point of pushing several countries on the continent into recession and South Korea on the brink of default.

With US inflation soaring, the Fed sees a strong dollar as a blessing. It helps insulate the (US) economy from additional inflationary pressures. »

Christopher Vecchio from DailyFX

For Eric Nelson, of Wells Fargo, the notable difference with 1997 is that“There are not many stable parities today, at least among the major emerging countries”. At the time, the collapse of the baht was partly related to its fixed parity with the dollar, forcing it to prop up its currency at the risk of depleting its foreign exchange reserves, a death sentence for the currency. Among the few still pegging its currency to the dollar, Lebanon announced on Thursday a sharp devaluation of the Lebanese pound, which rose to 15,000 pounds to the dollar, compared to 1,507 pounds.

Only the United States seems to be able to bring the temperature down, but “With US inflation soaring, the Fed sees a strong dollar as a blessing”According to Christopher Vecchio, of DailyFX. It helps isolate the economy (American) additional inflationary pressures.: The country pays less for its imported products. The monetary tightening led by the US Central Bank (Fed) is not causing anything “disturbance” In financial markets, US Treasury Secretary Janet Yellen said on Tuesday. For Adam Bouton, “The question is how bad must things be before the federal hubs?”

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