Since Trump’s victory in America’s presidential elections, the dollar had one of its sharpest rises ever against a basket of rich-country peers. It is now 40% above its lows in 2011. It has strengthened relative to emerging-market currencies, too. But the Economist argues that whilst stock markets in America have rallied on the prospect of stronger growth, they are being too cavalier. Indeed, the global economy is weak and the dollar’s muscle will enfeeble it further.
The weight of investors’ money has bet that Mr Trump will cut taxes and spend more public funds on fixing America’s crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America’s ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows.
America’s relative clout as a trading power has been in steady decline: the number of countries for which it is the biggest export market dropped from 44 in 1994 to 32 two decades later. But the dollar’s supremacy as a means of exchange and a store of value remains unchallenged.
The amount of dollar financing that takes place beyond America’s shores has surged in recent years. As emerging markets grow richer and hungrier for finance, so does their demand for dollars. Since the financial crisis, low interest rates in America have led pension funds to look for decent yields elsewhere. They have rushed to buy dollar-denominated bonds issued in unlikely places, such as Mozambique and Zambia, as well as those issued by biggish emerging-market firms. These issuers were all too happy to borrow in dollars at lower rates than prevailed at home. By last year this kind of dollar debt amounted to almost $10trn, a third of it in emerging markets, according to the Bank for International Settlements, a forum for central bankers.
As the greenback rises, borrowers husband cash to service the increasing cost of their own debts. As capital flows out, asset prices fall. The upshot is that credit conditions in lots of places outside America are bound ever more tightly to the fortunes of the dollar. It is no coincidence that some of the biggest losers against the dollar recently have been currencies in countries, such as Brazil, Chile and Turkey, with lots of dollar debts.
This time America starts with a big deficit and one that has already been politicised, not least by Mr Trump, who sees it as evidence that the rules of international commerce are rigged in other countries’ favour. A bigger deficit raises the chances that he act on his threats to impose steep tariffs on imports from China and Mexico in an attempt to bring trade into balance. If Mr Trump succumbs to his protectionist instincts, the consequences would be disastrous for all.
