Rising US dollar makes emerging markets jittery

The dollar has gained 10% against the Mexican peso and 8% against the Japanese yen

The election of Donald J Trump has set off a month-long run of investor ebullience, whose highlight has been a sustained increase in the value of the dollar against the world's currencies.

It is a surge that has been embraced on Wall Street as a powerful emblem for the United States economy potentially poised to hit a higher gear thanks to tax cuts, government spending and regulatory relief-policy measures that the president-elect has promised to enact immediately.

But around the globe, the surge in the dollar is provoking financial jitters. Emerging market countries and corporations that have been binging on cheap dollar debt for more than a decade now face a spike in servicing costs and elevated debt burdens.

And the global financial giants — banks, insurance companies and mutual, pension and sovereign wealth funds — that have financed this $10 trillion borrowing bonanza must confront a period of higher interest rates and tighter financial conditions that will make them less willing to extend credit to companies and investors alike.

“It is the ubiquitous nature of the dollar and its role in the global banking system,” said Hyun Song Shin, the head of research at the Bank of International Settlements, a forum for global central banks. “When the dollar goes up, it directly impairs the risk-taking capacities of banks and investors alike.”

Last month, shortly after Trump's victory, Shin released a paper, circulated widely since, arguing that the new “fear gauge” on Wall Street is the direction of the dollar. A sharp move up in the currency should be seen as a blinking red warning light for investors, he wrote. When it moves in the other direction, then it is “risk on,” to use trader parlance for when it is time to lay down speculative bets.

Since the election last month, a broad index for the dollar has risen 4 per cent. This move, however, masks even sharper increases against a number of currencies. 

The dollar has gained 10 per cent against the Mexican peso and 8 per cent against the Japanese yen. 

Against the Chinese yuan, the move has been less pronounced — just 1.5 per cent. But Trump's combative language toward China has ignited concerns in Beijing that local savers will try to send more of their deposits abroad, putting more downward pressure on the yuan.

The rockiest reaction so far to the dollar's tear has been in Turkey. When the Turkish lira fell to its lowest level in decades against the dollar last week, the country's president, Recep Tayyip Erdogan, took the unusual step of urging Turks to sell the dollars that they had been hoarding and buy their local currency.

With its high levels of debt in dollars and reliance on volatile capital flows for its financing needs, Turkey, more than most of its peers, has been vulnerable to the episodic fits of the emerging markets contagion that have plagued the global economy in recent decades.

© 2016 The New York Times News Service