The rise of the greenback looks like something to welcome. That is to ignore the central role the dollar plays in global finance

Dec 3rd 2016


THE world’s most important currency is flexing its muscles. In the three weeks following Donald Trump’s victory in America’s presidential elections, the dollar had one of its sharpest rises ever against a basket of rich-country peers. It is now 40% above its lows in 2011. It has strengthened relative to emerging-market currencies, too. The yuan has fallen to its lowest level against the dollar since 2008; anxious Chinese officials are said to be pondering tighter restrictions on foreign takeovers by domestic firms to stem the downward pressure. India, which has troubles of its own making (see article), has seen its currency reach an all-time low against the greenback. Other Asian currencies have plunged to depths not seen since the financial crisis of 1997-98.

The dollar has been gradually gaining strength for years. But the prompt for this latest surge is the prospect of a shift in the economic-policy mix in America. The weight of investors’ money has bet that Mr Trump will cut taxes and spend more public funds on fixing America’s crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America’s ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows.

Zippier growth in the world’s largest economy sounds like something to welcome. A widely cited precedent is Ronald Reagan’s first term as president, a time of widening budget deficits and high interest rates, during which the dollar surged. That episode caused trouble abroad and this time could be more complicated still. Although America’s economy makes up a smaller share of the world economy, global financial and credit markets have exploded in size. The greenback has become more pivotal. That makes a stronger dollar more dangerous for the world and for America.

Novus ordo seclorum
America’s relative clout as a trading power has been in steady decline: the number of countries for which it is the biggest export market dropped from 44 in 1994 to 32 two decades later. But the dollar’s supremacy as a means of exchange and a store of value remains unchallenged. Some aspects of the greenback’s power are clear to see. By one estimate in 2014 a de facto dollar zone, comprising America and countries whose currencies move in line with the greenback, encompassed perhaps 60% of the world’s population and 60% of its GDP.

Other elements are less visible. The amount of dollar financing that takes place beyond America’s shores has surged in recent years. As emerging markets grow richer and hungrier for finance, so does their demand for dollars. Since the financial crisis, low interest rates in America have led pension funds to look for decent yields elsewhere. They have rushed to buy dollar-denominated bonds issued in unlikely places, such as Mozambique and Zambia, as well as those issued by biggish emerging-market firms. These issuers were all too happy to borrow in dollars at lower rates than prevailed at home. By last year this kind of dollar debt amounted to almost $10trn, a third of it in emerging markets, according to the Bank for International Settlements, a forum for central bankers.

When the dollar rises, so does the cost of servicing those debts. But the pain caused by a stronger greenback stretches well beyond its direct effect on dollar borrowers. That is because cheap offshore borrowing has in many cases caused an increased supply of local credit. Capital inflows push up local asset prices, encouraging further borrowing. Not every dollar borrowed by emerging-market firms has been used to invest; some of the money ended up in bank accounts (where it can be lent out again) or financed other firms.

A strengthening dollar sends this cycle into reverse. As the greenback rises, borrowers husband cash to service the increasing cost of their own debts. As capital flows out, asset prices fall. The upshot is that credit conditions in lots of places outside America are bound ever more tightly to the fortunes of the dollar. It is no coincidence that some of the biggest losers against the dollar recently have been currencies in countries, such as Brazil, Chile and Turkey, with lots of dollar debts.

The eye of providence
There are lurking dangers in a stronger dollar for America, too. The trade deficit will widen as a strong currency squeezes exports and sucks in imports. In the Reagan era a soaring deficit stoked protectionism. This time America starts with a big deficit and one that has already been politicised, not least by Mr Trump, who sees it as evidence that the rules of international commerce are rigged in other countries’ favour. A bigger deficit raises the chances that he act on his threats to impose steep tariffs on imports from China and Mexico in an attempt to bring trade into balance. If Mr Trump succumbs to his protectionist instincts, the consequences would be disastrous for all.

Much naturally depends on where the dollar goes from here. Many investors are sanguine. The greenback is starting to look dear against its peers. The Fed has a record of backing away from rate rises if there is trouble in emerging markets. Yet currencies often move far away from fundamental values for long periods. Nor is it obvious where investors fleeing America’s currency might run to. The euro and the yuan, the two pretenders to the dollar’s crown, have deep-seated problems of their own. The Fed, whose next rate-setting meeting comes this month, may find it harder than before to avoid tightening in an economy that is heating up.

If the dollar stays strong, might protectionist pressure be defused by co-ordinated international action? Nascent talk of a new pact to rival the Plaza Accord, an agreement in 1985 between America, Japan, Britain, France and West Germany to push the dollar down again, looks misplaced. Japan and Europe are battling low inflation and are none too keen on stronger currencies, let alone on the tighter monetary policies that would be needed to secure them (see article).

Stockmarkets in America have rallied on the prospect of stronger growth. They are being too cavalier. The global economy is weak and the dollar’s muscle will enfeeble it further.

Source: http://www.economist.com/news/leaders/21711041-rise-greenback-looks-something-welcome-ignore-central-role?frsc=dg%7Cd

Ok.

Let the knowledgeable people below me give their eruditious inputs.

omo leave dollar matter alone , make we Naira self dey

Each country should try and focus on being self reliant by internal sourcing
The US dollars will definitely be stronger with this trump policies
Until there's free trade between other countries without using the dollars as legal tender

$1 =N500 by Dec 20

Empty pockets never held anyone back. Only empty heads and empty hearts can do that. --Norman Vincent Peale

okay o, let it keep flexing its muscle o....na naira I just pity with all these flexing of muscles o

kk

Brymo:
Q

javijabor1:
H

kolnel:
Ok

feodan:
b

Drienzia:
G

LordGuru1:
Ok.

what's all this, this early morning. Why dragging space when u have nothing to type

Can someone explain this in simpler terms please?

Na naira.. Go cry

Interesting

If you want to send money to relatives in Nigeria, I will buy your dollars at the rate of 410/$ while you deposit into my US bank account. Dont even bother with western union and co, they exchange for far less plus fees and delays.

See contact in signature.

How this one take affect the price of garri in the market?

,

We will start studying DOLLAR as a course in our universities and no thanks to Buhari

If it was in Nigeria we will call it Trump body language (TBL)
The last time we experienced body language (BBL) it landed us in recession

Okay

paulchineduN:
We will start studying DOLLAR as a course in our universities and no thanks to Buhari

It is only bad for import dependent/lazy ass Nation like ours but it is great news to export oriented nation like China, Germany, Japan etc.

The establishment and the New World Order Buffon's would never stop to amaze me.

Trump is already making America great! The market is at an all time high. He has already saved thousands of jobs. The dollar is getting stronger. Trump while even not in office yet has done more in 20 days than obummer did in 8 years. And what has they establishment to say? Growth is bad, strong dollar is bad, More jobs is bad. Smh for this cry babies.

Dollar and recession are the two most used words in 2016.

Ok

sashx:
The rise of the greenback looks like something to welcome. That is to ignore the central role the dollar plays in global finance

Dec 3rd 2016


THE world’s most important currency is flexing its muscles. In the three weeks following Donald Trump’s victory in America’s presidential elections, the dollar had one of its sharpest rises ever against a basket of rich-country peers. It is now 40% above its lows in 2011. It has strengthened relative to emerging-market currencies, too. The yuan has fallen to its lowest level against the dollar since 2008; anxious Chinese officials are said to be pondering tighter restrictions on foreign takeovers by domestic firms to stem the downward pressure. India, which has troubles of its own making (see article), has seen its currency reach an all-time low against the greenback. Other Asian currencies have plunged to depths not seen since the financial crisis of 1997-98.

The dollar has been gradually gaining strength for years. But the prompt for this latest surge is the prospect of a shift in the economic-policy mix in America. The weight of investors’ money has bet that Mr Trump will cut taxes and spend more public funds on fixing America’s crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America’s ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows.

Zippier growth in the world’s largest economy sounds like something to welcome. A widely cited precedent is Ronald Reagan’s first term as president, a time of widening budget deficits and high interest rates, during which the dollar surged. That episode caused trouble abroad and this time could be more complicated still. Although America’s economy makes up a smaller share of the world economy, global financial and credit markets have exploded in size. The greenback has become more pivotal. That makes a stronger dollar more dangerous for the world and for America.

Novus ordo seclorum
America’s relative clout as a trading power has been in steady decline: the number of countries for which it is the biggest export market dropped from 44 in 1994 to 32 two decades later. But the dollar’s supremacy as a means of exchange and a store of value remains unchallenged. Some aspects of the greenback’s power are clear to see. By one estimate in 2014 a de facto dollar zone, comprising America and countries whose currencies move in line with the greenback, encompassed perhaps 60% of the world’s population and 60% of its GDP.

Other elements are less visible. The amount of dollar financing that takes place beyond America’s shores has surged in recent years. As emerging markets grow richer and hungrier for finance, so does their demand for dollars. Since the financial crisis, low interest rates in America have led pension funds to look for decent yields elsewhere. They have rushed to buy dollar-denominated bonds issued in unlikely places, such as Mozambique and Zambia, as well as those issued by biggish emerging-market firms. These issuers were all too happy to borrow in dollars at lower rates than prevailed at home. By last year this kind of dollar debt amounted to almost $10trn, a third of it in emerging markets, according to the Bank for International Settlements, a forum for central bankers.

When the dollar rises, so does the cost of servicing those debts. But the pain caused by a stronger greenback stretches well beyond its direct effect on dollar borrowers. That is because cheap offshore borrowing has in many cases caused an increased supply of local credit. Capital inflows push up local asset prices, encouraging further borrowing. Not every dollar borrowed by emerging-market firms has been used to invest; some of the money ended up in bank accounts (where it can be lent out again) or financed other firms.

A strengthening dollar sends this cycle into reverse. As the greenback rises, borrowers husband cash to service the increasing cost of their own debts. As capital flows out, asset prices fall. The upshot is that credit conditions in lots of places outside America are bound ever more tightly to the fortunes of the dollar. It is no coincidence that some of the biggest losers against the dollar recently have been currencies in countries, such as Brazil, Chile and Turkey, with lots of dollar debts.

The eye of providence
There are lurking dangers in a stronger dollar for America, too. The trade deficit will widen as a strong currency squeezes exports and sucks in imports. In the Reagan era a soaring deficit stoked protectionism. This time America starts with a big deficit and one that has already been politicised, not least by Mr Trump, who sees it as evidence that the rules of international commerce are rigged in other countries’ favour. A bigger deficit raises the chances that he act on his threats to impose steep tariffs on imports from China and Mexico in an attempt to bring trade into balance. If Mr Trump succumbs to his protectionist instincts, the consequences would be disastrous for all.

Much naturally depends on where the dollar goes from here. Many investors are sanguine. The greenback is starting to look dear against its peers. The Fed has a record of backing away from rate rises if there is trouble in emerging markets. Yet currencies often move far away from fundamental values for long periods. Nor is it obvious where investors fleeing America’s currency might run to. The euro and the yuan, the two pretenders to the dollar’s crown, have deep-seated problems of their own. The Fed, whose next rate-setting meeting comes this month, may find it harder than before to avoid tightening in an economy that is heating up.

If the dollar stays strong, might protectionist pressure be defused by co-ordinated international action? Nascent talk of a new pact to rival the Plaza Accord, an agreement in 1985 between America, Japan, Britain, France and West Germany to push the dollar down again, looks misplaced. Japan and Europe are battling low inflation and are none too keen on stronger currencies, let alone on the tighter monetary policies that would be needed to secure them (see article).

Stockmarkets in America have rallied on the prospect of stronger growth. They are being too cavalier. The global economy is weak and the dollar’s muscle will enfeeble it further.

Source: http://www.economist.com/news/leaders/21711041-rise-greenback-looks-something-welcome-ignore-central-role?frsc=dg%7Cd

this is foolish jealous Propaganda. Why don't you build your economy. Must you depend on the white man. Smh

PissedOffWeed:
Good day all.....Please I really the help of you my dear and fellow nairalander!!
My sis Amarachi by name is on a Hot seat right now, as she is contesting for a pageantry "Ada Isikwuato"... I applaud her courage to even attempt to contest at this period when pageantry is somehow being ridiculed.
.
I decided to throw my support and weight behind....I make mouth sey she gonna win the Online Vote on FaceBook cos of the family I belong to, Nairaland of Course!
.
.
I need a massive Vote from you great guys and sweet ladies.. I don use una boast wella.....Pls just vote for her through the link below..then comment under her pix with either #AdaIsikwuato or #GettingBigger!
May God Bless you all!! Voting Ends Today's nite... Pls help me guys! She's Contestant Number 5!!!
.
https://m.facebook.com/adaisuikwuatocontest/photos/a.1201446163217453.1073741828.1201330346562368/1442301035798630/?type=3&comment_id=1449085435120190&_rdr#1449085435120190

She has to promise Nairalanders she hasn't eaten cucumber before now.

K

This nice

More the why you should invest the more. Check my signature.