Sharply Rising US Dollar Is a Historical Bad Omen
by Murray Gunn
Updated: July 26, 2022
History suggests that something is brewing.
Last week, we looked at the fact that central banks were ditching forward guidance after a relentless advance in the U.S. dollar, and how that might be related to the fact that an appreciating dollar is not welcomed by central banks. Mostly in financial markets, it's not the trend per se which is the issue but more the speed of the move. This comes across in the chart below.
It shows the 12-month Rate-of-Change in the U.S. Dollar Index going back to the 1980s and what jumps out is that most rapid rises in the dollar have presaged, or been coincident with, some sort of "event" in the economy.
The appreciation of the dollar from 1988 to 1989 was followed by the junk bond crisis which resulted in the bankruptcy of the iconic Drexel Burnham Lambert. The dollar advanced quickly from 1992 to the end of 1993. Then followed the Mexican peso and debt crisis, which spilled over into other Latin American economies.
The Russian default led into the famous hedge fund, LTCM, going bust in 1998, but before this the dollar had appreciated rapidly. Then the dollar's advance accelerated again, presaging the TMT (Technology, Media, Telecom) bubble bursting. There was a U.S. dollar advance leading up to the housing bubble peak in the mid-noughties and, of course, the dollar was the only currency people wanted when most people thought the end of the world had arrived at the end of 2008. We then had the process repeat for the Eurozone crisis and the global stock market slump in 2015-16 coinciding with China devaluing the yuan.
Now, in 2022, the U.S. dollar has appreciated very quickly from last year, and so what crisis or event is awaiting us this time? We know that emerging market countries are under severe strain with defaults rising. We also know that the rapid rise in bond yields will put incredible pressure on corporates and households when rolling over their massive debts. No doubt history will record something specific about the coming rupture in financial markets. We may not know exactly what it will be, but at least some of us will be prepared.
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