“We believe the USD is now close to peaking. The trade-weighted greenback looks stretched after gaining about 20% over the last two years. The last time the USD saw a similar surge, it didn’t end up well for the global economy.”
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Now, after seven years of the Fed’s ingenious interventions, the issue is more massive than ever. The dollar-denominated debt — loans and bonds — owed by non-bank borrowers outside the US has soared to $9.8 trillion at the end of the second quarter, according to the Bank for International Settlements. It has quadrupled since the Asian Financial Crisis and nearly doubled since the 2008 Global Financial Crisis. In relative terms, it has soared to nearly 18% of global GDP excluding the US, up from 8% just before the Financial Crisis.
These entities have all made the same bet: that the dollar would not rise, and that US interest rates would remain low. The Fed encouraged them to make that bet… This leaves the world in a precarious situation: currency bets have lined up with overwhelming weight long the dollar and short everything else, while non-US corporate and government entities owe nearly $10 trillion in dollar debt, a huge bet on the other side. There isn’t going to be a smooth and easy unwind. And chances are that the dollar will get knocked off its perch in the process.