The dollar tricked everyone

Bow down.
Bow down.
Image: Reuters/Kacper Pempel
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It’s hard to overstate the importance of the US dollar. Nearly 90% of all currency trades involve the dollar, meaning the currency is involved in $4.4 trillion worth of trades every day (pdf). Some 60% of currency reserves held by global central banks are in dollars, a total of $6.5 trillion. As the world’s dominant currency, the dollar is the lifeblood of the global financial circulatory system.

And yet, even with all the world’s eyes trained on it, the dollar has hoodwinked analysts, traders, and others this year. In 2017, the greenback suffered its worst year since 2003 as global growth picked up and forecasters expected the weakness to persist. Instead, the dollar has strengthened against nearly every other major currency in the world. It’s now at its highest level in more than a year.

The move wrong-footed traders, with disruptive consequences (paywall) for emerging markets in particular. The Turkish lira went into freefall as the dollar’s rise stoked fears that the country may struggle to repay its large stock of dollar-denominated debt. This fear infected other countries that don’t have ties to Turkey but do have a similarly large share of of dollar loans. This quashed the synchronized upturn in global economic growth at the start of the year, which was the talk of the Davos set. The share of countries growing above their economic potential has dropped to about 60%, from 80% last year, according to analysts at JPMorgan.

Perhaps the most prominent figure flummoxed by the unexpected strength of the dollar is Donald Trump. The US president can’t seem to decide whether the dollar’s strength is good or bad. Last month, he complained that a strong dollar put the US at a disadvantage. Yesterday, he boasted that ”money is pouring into our cherished DOLLAR like rarely before” (emphasis Trump’s). He clearly likes the aesthetics of a strong dollar but is torn by the implication that it crimps his growth and trade agendas by making American exports less competitive, puts a dent in companies’ overseas earnings, and takes the sting out of tariffs he’s imposing on major trading partners.

Analysts are undeterred, with many predicting that the strong dollar’s days are numbered. For real this time.