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Banking & finance
OpinionComment
Andrew Sheng
Andrew Sheng

Opinion | For how long will the world economy tolerate US dollar strength?

  • Exchange rate shifts reflect fundamental big-picture structural changes, and the strength of the US dollar matters in the geopolitical power game
  • If the markets perceive that macroeconomic management is flawed, like what happened in Britain, they can be brutal in punishing such mistakes

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The headquarters of the Bank of Japan in Tokyo on October 27. The BOJ has kept its monetary policy super easy even in the face of a strong US dollar. A change in stance by Japan’s policymakers could signal difficult times ahead for global markets. Photo: AFP
Andrew Sheng
After the US Federal Reserve raised interest rates by 75 basis points for the fourth straight time this year, financial markets are beginning to shake. The interest rate rises in response to higher inflation is a reversal of nearly two decades of generally declining global interest rates, higher asset bubbles and anaemic growth.
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The Bank for International Settlements (BIS) recently issued a paper looking at the policy implications of exchange rate swings. The US dollar index has broadly appreciated 10 per cent against the other currencies since the beginning of the year, 15.2 per cent since its recent low in June 2021 and 46.8 per cent since its 12-year low in August 2011.

The Japanese yen hit a recent low of 150 to the US dollar on October 20. Eisuke Sakakibara, Japan’s former vice-minister of finance who is known as “Mr Yen”, has hinted the yen could go to 170.
The BIS attributes three factors to the appreciation of the US dollar: an improvement in US terms of trade with higher oil prices that affect Europe and Japan as oil importers; divergence in monetary policy stance as the Fed is more aggressive in raising rates than the European Central Bank or Bank of Japan; and flight to quality because of war and fears of recession.

Where you stand depends on where you sit. Economists tend to look at prices and flows, which are changes in stock over time, because these are the most readily available numbers.

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However, if you look at Earth from 30,000 feet up, you see broadly the stock position while flows are small changes from that height. At ground level, you only see flows because the big stocks do not appear to change that fast.

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