ANOTHER POINT - I've spent a lot of time talking about US trade policy and why it should start to weaken the US Dollar, and I've spent a lot of time talking about how a pullback in stocks will force the Fed to reconsider its stance, to the point where it will need to be a little less hawkish, which should also weaken the US Dollar. And yet, there is another point here that I have not spent as much time talking about that I think needs to be abundantly clear. This point has to do with the emerging markets. What is it that the emerging markets have to do with the US Dollar you ask? Well...the answer is for many...a whole lot. You see, many emerging market economies need to take out debt in order to get them to a place where they moved into a more developed economy position. After all, if you want to build your country into development, you need to spend money. And as is the case, in order to grow, you need to spend.
BREAKING IT DOWN - So where is it that these countries go to borrow money to develop? You guessed it. They go to the US and borrow US Dollars in order to achieve their objectives. This means they are paying back Dollar denominated debt and fortunately for these countries, in recent years, those loans have been super cheap. But we also must remember that these countries are emerging countries and are therefore less stable and much more vulnerable to shakeups in the global economy. If things start to tense up, these economies are the first to suffer. And as you might imagine, all of those borrowed Dollars that have gone into investments that rely on global stability, are investments that quickly become losses, which means it becomes very difficult to manage the debt, with little coming in to service the debt. Now you throw a strengthening Dollar into the equation and guess what happens?
TAKEAWAY - What happens is an emerging markets crisis in which those debts can not be paid off and we get a collapse in these economies that ripples into the developed markets, with all of that debt at risk of default and lost. This is not a good outcome for the lender and this is not a good outcome for global economy that also relies heavily on the health of that lender. So everything is at risk of falling a part in such a scenario. This is why a stronger Dollar is not something that would be in the best interest of the global economy. The point I'm making here is that while it's clear many countries are going to be upset about the impact US trade policy has on their export economies, with a weaker Dollar making these exports less attractive, the downside in this scenario pales in comparison to the downside from an emerging markets catastrophe. So not everyone wants to see a stronger Dollar and those emerging markets may even be rooting for this new US trade policy.