For the first time in nine years, the United States is ready to hike interest rates. Meanwhile, major central banks around the world are still engaging in enormous quantitative easing programs to jump-start their economies.
Japan has dipped back into its fourth recession in five years despite the most massive quantitative easing experiment the world has ever seen.
Slow economic growth and low inflation has the European Central Bank considering another dose of quantitative easing.
China’s central bank may be on hold after its two-day devaluation in August wreaked havoc on global markets. The PBOC doesn’t want to risk losing its bid to have the yuan included in the IMF currency basket.
This growing divergence in central bank policy around the world has created a great imbalance in the global economic order, which establishes the very real potential for a rising dollar to trigger the next global financial crisis.
The Dollar May Be Entering a Mega Bull Market
The divergence in economic growth and central bank policies has caused the dollar to break out in a big way. The US Dollar Index (DXY) broke out of a 30-year downtrend that began with the Plaza Accord way back in September 1985.
(Chart Source: Barchart.com)
There may be a new mega bull market forming in the US Dollar.
The rising dollar is a big problem for the massive amount of dollar denominated debt held outside of the US. And this trend could very well be the trigger for the next global financial crisis.
The Biggest Consequence of a Rising Dollar
Low interest rates in the US have led to an explosion of borrowing in dollars around the world—especially in emerging markets.
Data from the Bank of International Settlements show that there is over $9.7 trillion in dollar denominated debt held outside of the US—up from $5.6 trillion at the end of 2008.
Much of that rapid growth in debt occurred in emerging markets.
Companies and governments in emerging markets have borrowed in dollars because of the ultra low interest rates available, but they earn the money to pay back those loans in local currencies.
It doesn’t matter how profitable a business is if the local currency is falling relative to the US dollar. It becomes more expensive to repay the loan with every uptick in the dollar and sinks the company further into debt.
The rising dollar could force international borrowers into a very messy process of deleveraging. There are a number of ways that could play out. Given the size of those loans though, a major blowback on the US and other developed markets should be expected.
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