Hyun Song Shin, the head economist for the Bank of International Settlements has recently laid out what he believes is the next threat to the global economy. One of the main things for him was the effect fluctuations in the dollar have on the global economy.
Dollar-denominated credit to non-US borrowers has skyrocketed over the last decade or so (even more so from outside of the US than domestic lenders). When financial institutions outside the US are dealing with both debt in dollars and debt in local currency, fluctuations in the exchange rate have a big impact.
When the dollar appreciates, things get tight for institutions lending in local currency. Shin thinks this may be behind recent global economic crises: Latin America in the 1980s and Asia in the 1990s.
And according to another expert, Raoul Pal, this might very well be the case in 2015. He thinks the big move to the dollar is yet to come.
“My view is that in 2015, probably in [January] or maybe [February] at the latest, the dollar is going to start its real move, which will be shocking in its velocity. It is that dollar rally that will clear break the key level in the $JPY, the Euro, the Aussie dollar, the ADXY (Asian DXY) and the RMB. I think that spills into all emerging equity markets and emerging bond markets too. Clearly this would cause the next down leg in oil and other commodities.”
And Jeff Gundlach has the same message: “Most investors challenged me when I informed them the dollar bottomed a long time ago. But look it up. The dollar is headed much higher.”
In other words, don’t be surprised if the Brazilian Real devalues to 3.30 to the dollar…
Source: Business Insider