Dr Debelle said the RBA had long awaited the recent appreciation of the US dollar, although it wasn’t sure what triggered the move. “Why the US dollar stayed at its low levels for as long as it did, and why it finally started to appreciate when it did, has baffled many in the market,” he said.
Something I was reading this morning:-
. Multiple trillions of dollars have left the US courtesy of quantitative easing and have ended up financing all manner of trades and investments around the world. As long as the dollar is neutral or falling, that’s a good thing for dollar carry-trade investors.
If you are a Chinese businessman and you can borrow dollars (which you certainly can)
and you believe that your government is going to make the yuan stronger over time, you will be
able to pay back cheaper dollars and make the difference on the carry (the difference between what
US bonds pay and returns that can be earned in China). But what happens if the yuan begins to
fall? That trade unwinds swiftly and negatively. And it unwinds at a time that is particularly
inconvenient for China. Flood the market with too much money, and inflation becomes a problem
It is not just China. Those dollars have filtered into every nook and cranny of the world;
and now, if those trades are unwound, investors and most specifically hedge funds are going to
have to buy dollars to unwind their trades. That will force the dollar ever higher against various
currencies; and while any one currency is not significant enough to create a structural difference
that can impact global trade, together they will have a significant effect.
There is a crisis brewing in emerging markets. Most of the world’s hedge funds and
investors are on the wrong side of the dollar trade. Unwinding that trade is going to be a bitch.
