The Rise of the Greenback
It isn’t difficult to discern the moment when the offshore boom in dollar lending reached its height. The date was September 22, 2012 and it occurred when Zambia did what other African Treasury officials had done during the frenzy of hot money that left America in search of return. The BRICS story isn’t so much oversold and told without mentioning the few nation states that capitalized on capital inflows. Zambia began issuing dollar denominated debt called a Eurobond, at a yield of 5.4%. Wait for it. . . they got $12 billion in orders. Mozambique took in nearly $850 million that year and Brazil’s Petrobras state owned oil issued $11 billion in ten year bonds. Now that we’ve appreciated, one can source the greenbacks bounce to foreign dollar denominated borrowing.
Why is this important?
If any central bank has a foreign currency debt (think Russia or Turkey with huge foreign denominated debt) the exchange rate becomes a massive fiscal amplifier. Many foreign nation states positioned themselves to short the dollar, when the shock hit, they scrambled to cover, effectively driving up the dollar.
The actual proximate cause of dollar appreciation is the Trump effect of having elected a Republican. Nevertheless, foreign central banks continue to scramble to contain currency volatility, and inflation while addressing immediate credit conditions throughout emerging economies. A stronger dollar hurts those residing south of the equator, if only because everyone rushes to pay off their dollar denominated debt effectively abandoning investments and jobs; just ask China. Funny thing how no one shows the damage done to currency arbitrage; the cost of hedging is prohibitively high.
Global vulnerabilities are growing, and with it components of America’s rise that will not play well for institutions that sought rent-seeking through carry trades and covered interest parity.
Get ready for the rise of the Greenback.
Originally published on William Holland’s blog.