“For currency traders, August was no day at the beach,” says Shuli Ren on Bloomberg. Trade war uncertainty means that the MSCI Emerging Markets Currency index is on course for its worst month since May 2016. China’s yuan fell to a new eleven-and-a-half-year low against the US dollar. But the falls have been broad-based. Last Monday Turkey’s lira briefly plunged as much as 12% against the yen in a “flash crash” that burnt Japan’s amateur forex traders.
The US dollar is near record high
The flipside of emerging-market currency weakness has been continued strength in the US dollar, much to the chagrin of one Donald Trump. Trump tweeted last week to complain that the dollar is “the highest… in US history”.
He’s not far wrong, says Andrew Hunter of Capital Economics. The US Federal Reserve’s trade-weighted index (tracking the greenback against a basket of trading partners’ currencies) is close to a record high. The White House believes that China and the eurozone have been “unfairly” pushing their currencies lower, which boosts their exports and fuels America’s trade deficit, which stood at $55.2bn in June. Yet there is little evidence that the strong dollar harms the US economy. Indeed, its strength has made the price increases triggered by Trump’s tariffs more bearable for US consumers.
Trump’s obsession with trade deficits is entirely wrong-headed, says John Mauldin in his Thoughts from the Frontline newsletter. Rather than being some sort of scorecard, the deficit means that Americans spend money on Chinese goods and Chinese people then reinvest those funds back into US assets, particularly Treasury debt. That keeps interest rates low and Americans wealthy.
A strong dollar puts pressure on emerging markets as businesses often borrow in dollars, but earn revenue in the local currency. China’s falling yuan is another problem as it could make exporters elsewhere in Asia less competitive. Yet most Asian economies look well insulated against an outright crisis, says Vincent Tsui of Gavekal Research. Rising domestic savings rates mean that local buyers are ready to buy up bonds when foreigners panic and flee. That makes local financial markets more stable than in the past.
That is just as well because dollar strength looks set to continue. Dollar assets remain a trusted safe haven during periods of global fear, and there is plenty of that around at present. With US interest rates still higher than those in Europe or Japan, asset managers are likely to continue pouring funds into the United States. In the long term, however, it is worth asking whether the dollar’s days as a reserve currency are numbered (see page 13).