Written by the editorial team of Today Magazine
Since the Federal Reserve started the interest rate hike cycle in March this year, the currencies of most countries in Europe, the United States, Asia and other countries have almost been in free fall. The trend of the exchange rate once morest the US dollar fell all the way.
As of September 27th,EURAgainst the dollar came to 0.966, down 15.09% this year,Japanese YenAgainst the dollar at 144.25, plunging 25.3%;GBPWhen it comes to 1.08, a heavy fall of 20%;RMBDepreciated to 7.15, down 12.42%;wonWhen it came to 1423, it collapsed by 19.69%.New Taiwan DollarAgainst the US dollar, it also fell below 31.7 yuan, down 14.54%.
The U.S. dollar’s dominance has caused currency disasters to be staged one following another. “The situation is deteriorating rapidly… In the future, the intervention of central banks to support local currencies may become more and more limited.” This is the worry of a foreign exchange research director at a foreign bank; in his words, “the situation is deteriorating rapidly” , is an “emerging Asian market” with an annual economic output value of more than 24 trillion US dollars, accounting for more than a quarter of global GDP.
In order to resist the purchase of the purchasing power of the local currency by the dollar monster, the foreign exchange reserves in emerging markets are rapidly “evaporating”. , seems to be taking shape.
“The circulation of the US dollar has always influenced the fate of emerging markets!” On September 9, at a seminar held by the Brookings Institution, a famous American think tank, he was the chief executive of the International Monetary Fund (IMF). Economist Maurice Obstfeld said so.
Obersfeld reviewed the dollar appreciation and depreciation cycles from 1999 to 2019 and found a “rule”: as long as the dollar appreciates significantly once morest the currencies of other developed countries, then, almost without exception, the economic situation in emerging markets Either from prosperity to decline, or even more tragic rapid deterioration.
“More than 80% of the external debt of emerging markets is denominated in US dollars…” Obersfeld explained that once the US dollar appreciates, the debt repayment pressure of many emerging countries’ external debt will immediately increase. “Many of emerging markets’ main exports are concentrated in commodities. According to our research, for every 1% appreciation of the US dollar, the price of commodities will decrease by far more than 1%.” This means that for emerging countries that rely on the export of raw materials , is facing the double-kill dilemma of “high debt pressure” and “sudden decline in income” at the same time.
In addition to the aforementioned “double-kill” pressure, Perez-Gorozpe, Jose, head of the global emerging market credit department of the credit rating company Standard & Poor’s, also proposed the third lethality of the strong dollar, which comes from imported goods. The lethality caused by the price increase, “this is undoubtedly another deep blow to emerging markets.”
How will the situation deteriorate further? Twenty-five years ago, a financial turmoil started by the US raising interest rates and then swept the entire East Asia, making emerging markets pay a very painful price. According to statistics, during the storm, 56 and 17 financial institutions were closed in Thailand and Indonesia respectively. 4 of the top 20 enterprise groups in South Korea went bankrupt, and many national financial institutions in Japan suffered massive losses and bankruptcy.
Will the near “doomsday” financial crisis 25 years ago happen once more in the current strong dollar environment?
Mark Mobius, known as the “Godfather of Emerging Markets”, reminded that, in addition to Asia, which has suffered a lot, and Latin America, the epicentre of the financial crisis, “you must be careful, many African countries with a high proportion of foreign debt also have It might be the tipping point for the next crisis.”
Although Mabius believes that the constitution of many countries is not what it used to be, “at present, the crisis will not spread widely.” But when asked regarding the difference between the US dollar’s strength and the past, he left a worrying foreshadowing. : “Time…! This time the US dollar has been strong for regarding two years, but from the past experience, the US dollar is usually not strong for only two years.”
It is worth noting that, if the financial crisis does detonate, compared with the previous strong dollar cycle, the global economic and financial situation this time may make it more difficult to “resolve the followingmath” of the crisis.
Source: Today Weekly Issue 1345
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