It looks like Brent Johnsons Dollar Milkshake theory is in full swing as uncertainty hits markets, you have three options in my opinion. You hide out in gold, bitcoin, or cash, as bitcoin is still an unknown to most people and gold is hard to custody most people would flock to cash. When you flock to cash you want the best of the bunch and that is the US dollar.
As local currencies in emerging markets lose value faster relative to the dollar, it encourages more people to jump ship and further putting pressure on the emerging market currency. These currencies need to raise interest rates, but have an upper limit on what they can do without pushing the country into a recession so central banks are being cautious.
The US is feeling inflation
As the US has its own inflation problems, they're trying to curb the demand for goods and services, by increasing the demand to hold dollars through interest rates. Something I don't think will work, because demand for food and energy is rather inelastic and this disinflation from interest rate hikes is really only hitting asset markets like stocks, bonds, and risk-on assets.
The stuff we consume has physical limitations to them and supply can only be brought online with time, so regardless of how poor you make people feel or how you try to encourage them to hold dollars, I don't see how that will reduce CPI.
Interest rate hikes get the dollar bull going
If we look at the DXY this chart measures the dollar vs a basket of other currencies and it's ripping higher, this is the highest it's been since 2002. If you consider that in the last 20 years more of those countries racked up dollar debts higher and higher, the pain they feel today is far worse than that they felt in 2002.
Trying to acquire dollars to repay debt and settle import contracts continues to get harder and we've already seen how that has affected countries like Sri Lanka, which have run out of FX (mainly dollars) to secure energy and there are now riots in the street with the president fleeing the country.
Image source: - dailyfx.com
Somethings gotta give
As long as the US doesn't feel the pain of the dollar rise, they're not going to care, they'll keep pushing for QT and rate hikes until something breaks in their local economy. The problem is the unseen, when you make it harder to get dollars in emerging markets, you slow down their economies, these economies are your trading partners, if they have less stuff to sell you, you will still get inflation.
I honestly have no idea where this is going, but considering this is the longest bear market we've seen in stocks since 2008, they're going to push it as far as they can, and when you do that things start to break.
We already have a post covid lockdown to deal with, an escalating proxy war, and overleveraged countries, companies, and people. I can't see how this has a good ending, even with bitcoin, most people aren't going to click in time and the cascading pain we saw in crypto will look like a kiddy pool compared to a deleveraging in the global stock, bond, and real estate market.
For those who don't like reading
Here's a great video that gives you an overview of how the dollar strength is affecting markets and what the possible interventions could be to try and stem the pain in emerging markets.
Have your say
What do you good people of HIVE think?
So have at it my Jessies! If you don't have something to comment, "I am a Jessie."
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