[Strong Dollar] Global Manufacturing and Trade Deterioration → Growth Slowdown → Dollar Strength 'Vicious Cycle'

[Asia Economy New York=Special Correspondent Joselgina] "The dollar is our currency. But it’s your problem."

The recent tense situation surrounding the strong dollar recalls a remark made by John Connally, then U.S. Treasury Secretary, at the 1970s Group of Ten (G10) meeting. Amid an already bleak economic outlook, the strong dollar is weighing even more heavily on countries other than the United States. This is why the warning about the unprecedented so-called ‘Dollar Doom Loop’ cannot be ignored.

◆ Why the "Unprecedented Doom Loop"?

John Turak, founder of JST Advisors, warned on the 17th (local time) via a podcast that the dollar doom loop refers to a vicious cycle where a strong dollar leads to worsening global manufacturing and trade, contraction in real investment, and slower growth, which in turn fuels further strength in the safe-haven dollar.

Turak pointed to the recent situation in Europe as a factor that could worsen the doom loop. Europe, facing an energy crisis due to the Ukraine war, is considered to have greater recession concerns than any other region. Turak warned, "This will put pressure on the euro, causing the dollar’s value to rise again," and "It will worsen the manufacturing cycle and repeat this entire cycle."

The euro’s value has already slipped below parity at ‘1 euro = 1 dollar.’ Morgan Stanley recently predicted that the euro could fall to 97 euro cents per dollar by the end of September. Stephen Gallo, head of European FX strategy at BMO Capital Markets, said, "The foreign exchange market is in the process of discounting a severe European recession."

The strength of the dollar as the global reserve currency inevitably has worldwide repercussions. If prices of international commodities priced in dollars soar, production costs and prices for companies using other currencies must also rise. This situation raises concerns about a global stagflation.

Additionally, global companies face increased burdens from dollar-denominated loan interest or principal repayments. There are also concerns about financial crisis risks in emerging countries with large dollar-denominated debts. In global financial markets, recession fears have already led to rapid capital inflows into the United States.

The situation is further complicated because major central banks, including the U.S. Federal Reserve (Fed), have entered or are about to enter tightening cycles to curb soaring inflation. This is a key difference from the strong dollar trends seen in 2008 and 2020.

Turak’s warning about the start of the doom loop due to the strong dollar is based on factors such as higher-than-expected inflation, soaring commodity prices, and tightening cycles by the Fed and other central banks. These are reasons why the dollar’s value, which has already risen double digits this year, is expected to continue rising.

The strong dollar also exerts upward pressure on inflation in major countries, accelerating the tightening moves of central banks aiming for price stability. Catherine Mann of the Bank of England (BOE) recently mentioned, "U.S. tightening policies are pushing up inflation in the UK."

◆ Intensifying Reverse Currency Wars

The strong dollar is also fueling so-called ‘reverse currency wars.’ Central banks worldwide are entering reverse currency wars to defend their own currencies’ values. The Swiss National Bank’s first interest rate hike in 15 years is a representative example.

According to the Financial Times (FT), 55 central banks tracked by the outlet raised interest rates by at least 0.5 percentage points 62 times in the second quarter. Since July, this number has exceeded 17 times. FT reported, "This is the largest number of major rate hikes since 2000," and "It has overshadowed the global tightening that preceded the financial crisis." Rabobank’s chief FX strategist, Jane Foley, said, "We are seeing a turning point where 0.5% becomes the new 0.25%."

This contrasts with past currency wars where countries fought to prevent their currencies from soaring to stimulate their economies. Experts analyze that the post-pandemic high inflation has driven this change. Supply chain disruptions caused by Russia’s invasion of Ukraine and China’s COVID-19 lockdowns also contributed to shifts in central bank policies. Japan, which has long pursued a weak yen policy, is also expected to shift toward yen appreciation soon.

The Wall Street Journal (WSJ) reported, "Few expect the dollar to change course soon. The strong dollar will continue for the time being," adding, "The strong dollar will be a double-edged sword for U.S. consumers and businesses."

This content was produced with the assistance of AI translation services.