The Next U.S. Dollar Crisis

U.S. Dollar Crisis

Market momentum is Red. However, we saw improvement thanks to a reduction in selling and a strong move today in the financial sector. That said, today’s rally came on the back of a very busy options expiration date. Bank stocks did not report strong earnings, slashed guidance, and effectively left their mortgage desks flailing in the wind on outlooks.  

The U.S. dollar pulled back slightly on Friday after another dramatic week. The surge in consumer and producer prices has pushed the Fed toward a 75-point interest rate hike in two weeks. The threat of a 100-point hike (which I argue is necessary) looms. 

The U.S. dollar’s run has been extraordinary. And it might not be over yet. That, in itself, is a massive problem. You see, nations around the globe loaded up on dollar-denominated debt during COVID-19, and now must pay those costs. As the U.S. dollar rallies, their currencies – some pegged to the greenback – cannot keep in lockstep. 

As the Fed raises rates quickly and aggressively, these debts spiral. It’s not the first time it has happened. This was the basis of the 1994 Tequila Crisis that I mentioned before. I’ve also shown you this chart of previous crises every time the Fed gets aggressive. 

The sirens are blaring…

Bank of America Warns

It’s nice when the banks confirm my suspicions. Bank of America and Wells Fargo both said that a recession isn’t the worst thing the Fed could cause. 

They’re now talking about a dollar-driven crisis. Emerging market currencies are getting hammered, and the Euro just hit parity. “In many cases, despite global equities in bear market territory and the risk of a global recession elevated, currencies have yet to approach the upper bound of their segment’s potential depreciation range,” Wells Fargo economist Brenda McKenna said today.

Bank of America said that as the Fed jacks up rates… we could see something worse than a recession shock… we’d see a “credit event.” They are predicting that credit risks are highest come November, unless there is a significant downturn in the U.S. markets in the next two months.

Is the U.S. Dollar In Danger?

We’ve effectively outsourced our inflation to low-wage markets for decades. Now, as de-globalization accelerates and supply chains crack, we’re witnessing a dramatic uptick in inflation. The Fed is backed into a corner right now. 

Raising too little on interest rates could leave inflation further entrenched in the economy – and push us into a situation where consumer confidence erodes well into 2023 and wipes out savings. On the other hand, raising too much could signal a Fed panic, drive up America’s borrowing costs, and create a spiral that affects dozens of nations that struggle with their dollar-based debt. 

Even worse for the market, a stronger dollar will hammer companies that sell in global markets and must repatriate profits from weak currencies into a stronger dollar. Think McDonald’s (MCD), Phillip Morris (PM), Texas Instruments (TXN), and PepsiCo (PEP).

Many people think that one day the U.S. dollar will collapse. That it will be worth less than the paper it’s printed upon. That too much money printing will cause nations to abandon it… 

But I propose another issue for the greenback. In a post-Gold standard world, the dollar became the main instrument of trade for commodities, debt settlement, and more. Perhaps its strength could put it out of business… if nations can’t afford it – and they have to choose between hyperinflation, default, or worse should the U.S. dollar continue its breakneck pace. 

This is something to think about and study further. One crisis like we saw in Mexico in 1994 – is bad enough. The thought of multiple at the same time is probably not something that anyone considered even six months ago.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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