Opinion By Paul Krugman September 12, 2022 https://www.smh.com.au/business/mar...ar-is-a-bit-of-a-mystery-20220912-p5bha2.html In 1971, John Connally, Richard Nixon’s treasury secretary, told his counterparts from other major economies that “the dollar is our currency, but it’s your problem.” The context — the lingering demise of the Bretton Woods currency system — is ancient history. But his statement, remarkably, still rings true after all these years. I say “remarkably” because the US no longer dominates the world economy the way it once did. In 1960, the United States accounted for about 40 per cent of the world’s gross domestic product; now it’s less than one-quarter. Furthermore, there are now two other currencies — the euro and the yuan — serving economies roughly comparable in size to our own. The US dollar is the king of currencies.Credit:AP Yet the dollar remains dominant in world financial markets. For example, when emerging market economies borrow abroad, their debt is still overwhelmingly denominated in US dollars. The dollar’s financial dominance appears to give the US exchange rate — the value of the dollar in terms of other currencies — huge significance in the world economy. A new paper by Maurice Obstfeld and Haonan Zhou argues that there is a global “dollar cycle”; when the dollar is strong, this creates financial and economic stress around the world. And the dollar has been very strong lately. As I see it, there are three big mysteries about the power of the dollar. The first and easiest is why the dollar remains dominant even though the US economy isn’t. The second, more puzzling question is why fluctuations in the dollar have such strong global effects. Finally, there’s the question of why the dollar has risen so much recently. On the first question, part of the answer is the role of history. Once a currency has established global dominance, that very dominance tends to become self-perpetuating. Making transactions in dollars is easier and cheaper because so many other people are using dollars; borrowing in dollars tends to be cheaper because a lot of world trade is invoiced in dollars, and the low cost of financing encourages dollar invoicing. Also, it’s easier and safer to use a currency globally if it’s backed by a home-country financial market in which assets can be easily bought and sold. The combined financial markets of euro-area countries are huge, but they’re also somewhat fragmented; for example, Italian bonds sell at a discount compared with German bonds. And it’s hard to feel secure about relying on Chinese markets when the country maintains controls on movements of funds into or out of the country — and is ruled by an increasingly erratic autocrat. But even if there are good reasons for the dollar’s dominance, why are the effects of dollar fluctuations so large? Obstfeld and Zhou argue that because a lot of world debt is denominated in dollars, a rising dollar creates balance sheet problems around the globe. That makes sense. But I still find the apparent size of the effects startling. I’m especially puzzled by the strength of the relationship between the dollar and the prices of global commodities like oil and wheat. Put it this way: You might think — or anyway, I might think — that when the dollar rises against the euro, the price of, say, oil would fall in dollars but rise in euros. But that’s not what they find; confirming a result I’ve seen many times, they find that “a one per cent appreciation of the dollar is associated with a much larger per cent fall in average global commodity prices.” When the dollar rises against the euro, the price of oil doesn’t just fall in dollars; it falls in euros, too. Federal Reserve chair Jerome Powell. The central bank is raising rates as it fights inflation, driving the US dollar higher. Credit:AP But why is the dollar up so much? At first sight, the answer seems obvious: It’s all about the Fed. The Federal Reserve has been raising interest rates to bring inflation down, which, other things being equal, makes buying dollar assets more attractive and raises the dollar’s value. But the Fed isn’t the only central bank hiking rates. International economists normally believe that exchange rates are driven by long-term, not short-term, rates — and long-term rates depend not just on what a central bank has already done but on what investors expect it to do in the future. So here’s the funny thing: Long-term rates have risen as much in Europe as they have in the United States. In December 2021, the interest rate on US 10-year bonds was 1.47 per cent; the corresponding rate in Germany was minus 0.38 per cent, reflecting investors’ belief that the European economy faces many years of weak growth. As of this morning, the US rate was 3.31 per cent, up 1.84 points since December; the German rate was 1.69 per cent, up 2.07 points over the same period. So Europe seems to have had as much or more effective monetary tightening as the US Why, then, has the euro plunged? The dollar may be other countries’ problem, but even a purely self-interested America needs to live in the world our policies help shape. It’s not hard to come up with possible reasons, especially the fact that Vladimir Putin’s de facto gas embargo is hitting Europe hard. But in any case, dollar strength seems to be about more than the Fed’s fight against inflation. Whatever the reasons, however, it’s clear that the strong dollar is inflicting a lot of pain on economies around the world. Once again, it’s our currency but their problem. Should this influence policy? Claudia Sahm, a former Fed economist (inventor of the famous Sahm Rule recession indicator), has been a strong critic of the Fed’s hard line on inflation and more recently has been arguing passionately that the Fed has a responsibility to consider the damage its policies are inflicting on the rest of the world. She has a point. Unfortunately, I don’t think the Fed will listen — yet. Federal Reserve officials are still deeply worried about the possibility that high inflation will get entrenched in the US economy, and that concern will dominate everything else until there are clear signs that underlying inflation is coming down. Once the Fed feels that it has some breathing room, however, it should start taking international repercussions into account. The dollar may be other countries’ problem, but even a purely self-interested America needs to live in the world our policies help shape. This article originally appeared in The New York Times.
A currency cannot exist by itself. Its value is relative, usually to some other currency. Criticism of fiat - infinite supply and under central bank control. Crypto is supposed to fix these two but it has become a speculative heaven. USD still have >80% market share.
I think it is simply a matter of beta. When the dollar rises people flee to the safe haven and when the dollar goes down it means economic conditions have loosened so that translates into buying assets with the most beta which is EM or Nasdaq. Whats fascinating since the pandemic is that the dollar is a better of measure of risk than the VIX is. The VIX is broken or maybe the players don't use SPX puts anymore to hedge. You can bet if the dollar goes up a few days in a row that the equity markets are going down. In my opinion Volker's rate policy ultimately skyrocketed the dollar. Global leaders had to convene an intervention known as the Plaza Accord in 1985 in which G5 tried to reduce the value of the dollar by 20% -- this is what ultimately led to the 1987 crash and the subsequent fund flows to the Nikkei bubble. Investors pulled their money from NYC and moved it to Tokyo since the dollar was collapsing and the Yen was skyrocketing.
Military power keeps the dollar the safe haven. And Krugman is a babbling moron who is wrong 99% of the time when he makes a market/economic prediction
Look...If the rest of the world wants to make the USA a shithole country, then they can start valuing all their GDP in their own currency, and start trading their goods in their currencies. It is really that simple. Why compare everything to the USD? Why doesn't Europe just start marketing their wares in EUR/JPY for example? It is not the USA's fault that USD exists. Just stop talking about the fucking USD, and America will go away. Europe, did that ever occur to you? Start valuing the cryptos in GBP, or Euros, or Vietnamese Dong. Leave America out it for crying out loud, if you are so damned secured in your self-reliance with your own currency! Morons.
rising dollar is one of the signs that confirm bear market is coming, though not at the immediate moment.
Sorry, but I beg to differ. One thing that is indisputable is that USA is the net importer, whereas every other country is a net exporter. Without us importing their goods, their economy would collapse. That's why China can't do shit even when we slap on these unfair tariffs. But then again, we've helped them grow and prosper. And what does China do in return? They want to stab us in the back. Such an ungrateful POS.
USD and other worthless digits like yens, yuans, euros , pounds only have value since billions of people are brainwashed into thinking gold and silver ARE NOT MONEY and fiat is better. Except India- they know truth of this matter. And except top Russian members of gov, business and banking. Countries like Japan, Korea, Norway, UK, France, Italy, Spain truly believe gov bonds and gov currencies are wealth , hahahaha. So please show us what % of personal wealth of Rothschilds and Bill Gates is in USD currency? My bet is below 0.01%
Love those delusional gold buggers. Annnnyday now Gold will be used as money again. Only thing is how do you mint enough 99.9% pure gold coins to be used in commercial transactions for a marketplace of 7+ billion people? LOL