Strong Dollar has been the key cornerstone of recent crisis, especially facing by emerging markets. Emerging market corporates large Dollar exposure is threatening the stability of the whole economy. According to latest data from Bank of International Settlements (BIS), average exposure to Dollar debt is almost 30% of total debt and for some countries, like Philippines that share is 80%. For Mexico it is 50%, even for countries like Brazil, Indonesia, South Korea, Turkey that share is well above 30%.
Strong Dollar and expectations of rising interest rate in US has been key element behind the turmoil in their currencies. Strong Dollar, even played quite a role in drop in commodity prices.
Strong Dollar has also kept US economy in a tough spot. Corporate cross border earnings have suffered a lot, especially due to drop in EM exchange rates. Inflation has also remained subdued. Trade balance has suffered to a great extent.
All in all, it would seem strong Dollar could hardly be anyone's desire.
But concluding there would be very very wrong. Strong Dollar may have left scar on global economy but a weaker Dollar at this point could be worse.
It is vital to note, as crisis emerging and FED hike probability diminishing, Dollar has taken a hit this year. It is also important to not it hasn't gained much in 2015 after March, it was more of a consolidation. But this year it is down (Dollar index) more than 2.5% and 3% in last three months. So a weaker Dollar is a very real possibility.
Why weak Dollar could be worse -
- Recent price action shows, weakness in Dollar hasn't been much of a help to commodities. So if Dollar weakens broadly, commodity exporting countries, which found refuge in stronger Dollar, would see further economic deterioration.
- Central banks around the globe would struggle to find suitable policies to boost inflation and support economy. For example Bank of Japan (BOJ) introduced new stimulus via negative rate, however that hardly weakened yen against Dollar and Dollar weakness is to partially blame for it. Similar is happening with EUR/USD, despite ECB indicating stimulus in March. Central banks would struggle with the policies to weaken currency and boost inflation.
However Dollar might provide respite to EM corporates and currencies but that is unlikely to sufficient the current outflow and risk aversion trend.
