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  • MAP Asia Pacific Ltd

How a strong US Dollar is pushing global economy into recession, and it’s just getting started

George Boubouras was at his home in east Melbourne, taking in a cricket match, when his phone suddenly blew up. It was late on July 13, about 10:45 p.m., and there was an urgency to the texts and calls that came flooding in. The euro had just crashed through parity against the dollar, a level once almost unthinkable, and everyone — clients, fund managers, traders — wanted to know what Boubouras, the head of research at K2 Asset Management, recommend they do. His response was simple: “Don’t fight the dollar right now.”

Just over an hour later, another jolt came. The Bank of Canada, struggling like the European Central Bank and other central banks to keep its currency steady against the dollar, delivered a full percentage-point increase in interest rates. Almost no one saw it coming. Ten hours later, another shock: the Monetary Authority of Singapore jumped into the foreign-exchange market, announcing a bid to push its currency back higher against the dollar.

At this point, Mitul Kotecha’s phone began buzzing alerts non-stop, too. A Singapore-based strategist at TD Securities, Kotecha was vacationing with his wife at a resort in Thailand. It was their 25th anniversary and he was lounging on the beach and the whole scene seemed a little surreal to him. “It was all happening in a crazy short period,” he says. “I couldn’t believe the mayhem.”

The dollar, the currency that powers global trade, is on a tear that has few parallels in modern history. Its ascent is the result primarily of the Federal Reserve’s aggressive rate-hiking — it raised by another 75 basis points on Wednesday — and has left a trail of devastation: Driving up the cost of food imports and deepening poverty across much of the world; fueling a debt default and toppling a government in Sri Lanka; and heaping losses on stock and bond investors in financial capitals everywhere.

The greenback now stands at an all-time high, according to some gauges. It’s up 15% against a basket of currencies since mid-2021. And with the Fed determined to keep driving rates up to quell inflation — even if it means sinking the US and global economies into recession — there’s little that most long-time currency watchers see to brake the dollar’s climb.

It’s all a bit reminiscent of the Fed’s Paul Volcker-led anti-inflation campaign in the early 1980s. Which is why chatter is growing about the possibility of a redux of the Plaza Accord, the agreement that international policy makers cut to artificially rein in the dollar back then. A similar deal may look like a long shot right now, but with some market metrics suggesting the dollar could easily climb the same amount again — gains that would convulse the global financial system and trigger all sorts of additional pain — it’s likely only a matter of time before that talk heats up.

“There is no kryptonite to blow up the dollar’s strength immediately, with the Eurozone hampered by the war in Ukraine and China’s growth uncertain,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “There is simply no alternative to the dollar no matter where you look and it’s pummeling everything else as a result — economies, other currencies, corporate earnings.” The US currency’s rapid ascent is being felt in daily life around the world because it’s the lubricant for global commerce — roughly 40% of the $28.5 trillion in annual global trade is priced in greenbacks. Its relentless rise risks creating a self-sustaining “doom loop.”

“You have recession concerns leading to dollar strength, and then tightening financial conditions leading to more recession concerns,” said Joey Chew, strategist at HSBC Holdings Plc in Hong Kong. “There’s no immediate solution around this.” Demand for the dollar has been hot for a simple reason: when global markets go crazy, investors look for a safe haven. And as the Bank for International Settlements put it, that security is “fulfilled now primarily by the US dollar.” The size and strength of the US economy remains unparalleled, Treasuries are still one of the safest ways to store money and the dollar makes up the lion’s share of foreign-exchange reserves.

Some of the top dollar gauges reveal its capacity to rise further. While the Bloomberg Dollar Spot Index hit a record this month, it is only measured from the end of 2004. The narrower ICE US Dollar Index — its performance against developed peers — is still well below levels seen in the 1980s. It would take a 54% rally to get it back to its peak in 1985, the year of the Plaza Accord.



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