We have just recently wrote that in the dollar bear market of the past decade, the BRIC countries have been the darlings of international speculative capital. But in recent months, the BRIC countries no longer receive strong inflows anymore. Their currencies have been under downward pressure.

The chances are that the market consensus on the dollar may change within a few months. Or will it?

James Saft wrote in a recent Reuters column about what a strengthening of the dollar means to the world. And Saft, like us, believe this could trigger the next crisis within couple years… here is a snapshot:

“For all the dysfunction in Washington we could, it seems, be in the midst of an historic and potentially extended bull run for the U.S. dollar.

The dollar is up a bit less than 4.0 percent over a year against a trade-weighted currency basket, in substantial part because of economic weakness, fragility and radical policy in places like Japan, Europe and Britain.

It is remarkable that we should be entertaining the idea of an extended dollar bull run …

Currencies are a relative game, however, and things elsewhere, as you may have heard, are not so hot.

So sure, the dollar has some lame competition in the global currency horse race, but a dollar rise, if it comes, will be driven importantly by internal changes which may just be coming into view.

The US economy is, relatively speaking, in better cyclical and structural shape, the Fed will likely be the first central bank to exit QE…

Given that up and down cycles in the dollar usually last six to eight years … the low the dollar touched in 2008 amid the crisis may be a bottom this time round, implying we might see several years of dollar appreciation from here.

That would clearly have huge implications globally, arguing for potentially difficult conditions for emerging markets, which have a nasty tendency to fall into crises of their own when the dollar rises sharply.

Don’t underestimate the power of the energy and manufacturing changes now taking root in the U.S. More domestic energy means less money sent overseas and will also tend to make manufacturing at home more internationally competitive. 

One area of concern if the dollar strengthens is the impact on emerging markets. The 1980s dollar rally helped to choke off growth in Latin America while that of the 1990s led, at least indirectly, to the Asian crisis. 

The important thing to remember is that extended rises and falls of the dollar usually end in crisis.”

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