Surge in dollar provokes global jitters

Many emerging markets fear an end to cheap credit as currency adds muscle and Wall Street sets records

The election of Donald Trump has set off a monthlong run of investor ebullience, whose highlight has been a sustained increase in the value of the dollar against the world’s currencies.

It is a surge that has been embraced on Wall Street as a powerful emblem for a U.S. economy potentially poised to hit a higher gear thanks to tax cuts, government spending and regulatory relief — policy measures that the president-elect has promised to enact immediately. It helped the Dow Jones industrial average and Standard & Poor’s 500 indexes soar Wednesday to their biggest gains since the presidential election and set all-time highs.

But around the globe, the surge in the dollar is provoking financial jitters.

Emerging market countries and corporations that have been bingeing on cheap dollar debt for more than a decade now face a spike in servicing costs and elevated debt burdens.

And the global financial giants — banks, insurance companies and mutual, pension and sovereign wealth funds — that have financed this $10 trillion borrowing bonanza must confront a period of higher interest rates and tighter financial conditions that will make them less willing to extend credit to companies and investors alike.

“It is the ubiquitous nature of the dollar and its role in the global banking system,” said Hyun Song Shin, the head of research at the Bank of International Settlements, a forum for global central banks. “When the dollar goes up, it directly impairs the risktaking capacities of banks and investors alike.”

Last month, shortly after Trump’s victory, Shin released a paper, circulated

widely since, arguing that the new “fear gauge” on Wall Street is the direction of the dollar.

A sharp move up in the currency should be seen as a blinking red warning light for investors, he wrote. When it moves in the other direction, then it is “risk on,” to use trader parlance for when it is time to lay down speculative bets.

Since the election last month, a broad index for the dollar has risen 4 percent. This move, however, masks even sharper increases against a number of currencies. The dollar has gained 10 percent against the Mexican peso and 8 percent against the Japanese yen.

Against the Chinese yuan, the move has been less pronounced — just 1.5 percent. But Trump’s combative language toward China has ignited concerns in Beijing that local savers will try to send more of their deposits abroad, putting more downward pressure on the yuan.

The rockiest reaction so far to the dollar’s tear has been in Turkey. When the Turkish lira fell to its lowest level in decades against the dollar last week, the country’s president, Recep Tayyip Erdogan, took the unusual step of urging Turks to sell the dollars they had been hoarding and buy their local currency.

With its high levels of debt in dollars and reliance on volatile capital flows for its financing needs, Turkey, more than most of its peers, has been vulnerable to the episodic fits of the emerging markets contagion that have plagued the global economy in recent decades.

Boldly new, as well as contentious, Shin’s thesis has not been wholly embraced by economists and policymakers.

For example, William Dudley, the president of the Federal Reserve Bank of New York, the regulator that keeps the closest eye on incipient financial risks, has made it clear on numerous occasions that the dollar’s recent rise should be seen as a positive sign.

It is not just what a strong dollar says about a growing U.S. economy, but it is the further prospect that, as a result, Japan and Europe may also emerge from their years of deflationary slough.

“The dollar is firm because people view the U.S. economy as having a better outlook — that is certainly a good thing,” Dudley said in a recent interview with CNBC. “So that is not something I would be particularly concerned about.”

But as Shin and his team of economists at the Bank of International Settlements see it, it is not just the threat of the dollar’s rise precipitating a crisis in a dollar-sensitive market like Turkey, South Africa or Brazil that is cause for worry.

His concerns also center on the global banking system and the possibility that the dollar’s rise will accentuate what he refers to as an emerging dearth of dollars, which could bring back memories of the financial crisis in 2008 and 2009, when a global rush into dollars created a liquidity panic. Short-term borrowing rates skyrocketed, forcing hedge funds to shut down and banks to fail.

“The lessons of the dollar is that everything is connected,” he said. “Spillovers and spill-backs can loom large.”