Photo: Associated Press
The Darker Side of the Dollar’s Rise
Expectations of better growth are also tightening financial conditions
By Richard Barley
Expectations of stronger U.S. growth as President-elect Donald Trump opens the fiscal taps have lit a fire under the dollar—with the greenback reaching a 13-year high measured by the ICE Dollar Index. But a stronger dollar, especially given its rapid rise, has already exposed weaknesses that have been ignored by investors. There could be more.
The shift has jolted investors into action. Last week they put $27.5 billion into global equities, while pulling $18.1 billion out of bonds, the biggest moves in two and three and a half years respectively, Bank of America Merrill Lynch notes. The result is higher yields and tighter financial conditions. The pain trade has been in emerging markets, where there has been a rapid negative reaction to higher U.S. yields and a stronger dollar.
A stronger dollar means weaker currencies for some struggling regions, notably Europe and Japan.
But tightening elsewhere could offset any gains these regions would get from rising exports driven by their weaker currencies.