What does a strong dollar mean for the world ?
In its attempt to fit, to the strong US Dollar, the world is changing quickly. The faster the dollar gets strong and the faster each economy must fit to the new world order. If there was anyone who didn’t took seriously the power of King Dollar, should think it again. Our-days the market interactions are very fast, as the arbitrage, the high frequency trading and the smart money try to take profits from such opportunities. These kind of opportunities come only a few times in a decade and certainly the Big Money could not miss it. Such a strong dollar, within two to three years, in such a strong trend, means high impact in the financial markets and economies around the world. But let’s take a look to the main international developments materialized under the shadow of a strengthening dollar:
- The plunge in the commodity prices is one of main results of a strong dollar. Investors don’t remember such a huge slump in almost all the commodity prices. The greenback has had a strong correlation in years with the trend of the commodity index.
- The currency devaluations in the Emerging Markets were another leitmotiv of the past year. China’s devaluation had a strong impact on all the Far East Asian’s currencies. One after the other, these countries have started to devalue their currencies in an attempt to make their economies much competitive.
- The BRICS crisis is also an indirect result of the strong dollar and very low commodity prices. Brazil, Russia and South Africa depend very much on the energy prices, as they are huge exporters of such commodities. Many other Emerging Countries have seen their public deficit budgets collapsing. Gulf countries have started to withdraw their petrodollars from the financial markets causing volatility and concern amid investors. These counties also are trying to devalue national currencies in the attempt to reduce costs of production of their exporting oil.
- The strengthening dollar is one of the reason of the plunge in some of the main emerging financial markets around the world. As American fund mangers were concerned about the rising currency risk of their investment overseas, they tried to be protected and withdrew part of their investments.
- The investment strategies of the Hedge Funds went wrong. The past year was one of the worst in terms of returns, -3.7% in average, according to Hedge Fund Research Inc. This was a result of the explosion of the volatility in the emerging markets, a direct result of the devaluation of their currencies and the foreign investments outflow.
- The record low inflation rates and interest rates, amid developed countries are also partly a result of a strong dollar. In the US the import prices dropped, allowing the Fed to keep interest rates at record low levels although unemployment went down at record speed. Europe as a large energy importer could also keep interest rates low without preoccupations of inflationary pressure.
- The worsening of the balance of payments in the emerging markets like China, Brazil, Russia and Gulf Countries, with huge drop of their foreign exchange reserves, is a result of the collapse in the oil and gas prices, the outflows of western investments and the national currency devaluations.
“The Master of the Universe” has played its music, hitting the financial markets and international economies in a way that many investors would not have thought. The Hedge Funds average performance gives us an idea of how complicated has become to invest in our-days’ markets. Even as many analysts had predicted a parity in the Eur/Usd pair and also a higher Dollar Index till the end of the past year, a few of them had thought this would have had similar impacts.