Coronavirus crisis strengthens the dollar’s role in the global economy

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Foreign issuers migrated to the dollar this year at a record pace, and sovereigns from Indonesia to Colombia, companies like Nissan and the Manila sanitation concessionaire accumulate sales of $ 1.29 trillion.

It is an important economic lesson from the Covid-19 crisis: as it did in the wake of the 2008 global financial meltdown, the dollar consolidates its role as the world’s dominant currency, even though President Donald Trump’s unilateralist policies upset allies and rivals.

“Whenever there is a crisis, companies and countries rush to make sure they have all the financing they need,” said Jim O’Neill, the former chief economist at Goldman Sachs who coined the acronym BRIC.

“Dollar markets are the only real source available, so the whole situation intensifies from itself,” according to O’Neill, who is chairman of the international policy group Chatham House.

The ease of obtaining dollar financing worldwide has been instrumental in preventing the economic and health crisis from turning into a financial spiral by providing businesses and governments with cheap access to funds.

But it may also be sowing seeds for the next crisis: if the dollar goes through a sustained appreciation trend, debt service costs will increase, which may make payments in the future more difficult.

This is a particular risk for emerging markets, where foreign debt, including dollar loans, rises at the fastest rate ever recorded, with year-round issues about to exceed $ 750 billion, according to Bloomberg strategist Damian Sassower Intelligence.

The lack of global alternatives helps to explain part of the dollar’s role. The status of the euro as a reserve currency remains limited, and China’s currency is still subject to capital controls.

It is also a matter of cost. The Federal Reserve still injects enormous liquidity and, with the expectation that interest rates will remain close to zero in the coming years, the dollar is even more attractive as a source of financing.

The total issuance of $ 1.29 trillion borrowers outside the United States this year is 21% higher than the same period in 2019, according to data compiled by Bloomberg.

But the critical role of the dollar also has a downside. It leaves emerging markets dependent on the direction of US monetary policy. Although it seems distant now, the Fed’s tightening of policy may spur the dollar’s appreciation.

“The widespread dependency on the dollar leaves the international financial system hostage to the vagaries of US policies, especially the Federal Reserve,” said Eswar Prasad, who has already led the staff of the International Monetary Fund in China and works at Cornell University. “For emerging market economies, in particular, it can create devastating effects on capital flows and exchange rates.”

Source: Infomoney

Foreign issuers migrated to the dollar this year at a record pace, and sovereigns from Indonesia to Colombia, companies like Nissan and the Manila sanitation concessionaire accumulate sales of $ 1.29 trillion.

It is an important economic lesson from the Covid-19 crisis: as it did in the wake of the 2008 global financial meltdown, the dollar consolidates its role as the world’s dominant currency, even though President Donald Trump’s unilateralist policies upset allies and rivals.

“Whenever there is a crisis, companies and countries rush to make sure they have all the financing they need,” said Jim O’Neill, the former chief economist at Goldman Sachs who coined the acronym BRIC.

“Dollar markets are the only real source available, so the whole situation intensifies from itself,” according to O’Neill, who is chairman of the international policy group Chatham House.

The ease of obtaining dollar financing worldwide has been instrumental in preventing the economic and health crisis from turning into a financial spiral by providing businesses and governments with cheap access to funds.

But it may also be sowing seeds for the next crisis: if the dollar goes through a sustained appreciation trend, debt service costs will increase, which may make payments in the future more difficult.

This is a particular risk for emerging markets, where foreign debt, including dollar loans, rises at the fastest rate ever recorded, with year-round issues about to exceed $ 750 billion, according to Bloomberg strategist Damian Sassower Intelligence.

The lack of global alternatives helps to explain part of the dollar’s role. The status of the euro as a reserve currency remains limited, and China’s currency is still subject to capital controls.

It is also a matter of cost. The Federal Reserve still injects enormous liquidity and, with the expectation that interest rates will remain close to zero in the coming years, the dollar is even more attractive as a source of financing.

The total issuance of $ 1.29 trillion borrowers outside the United States this year is 21% higher than the same period in 2019, according to data compiled by Bloomberg.

But the critical role of the dollar also has a downside. It leaves emerging markets dependent on the direction of US monetary policy. Although it seems distant now, the Fed’s tightening of policy may spur the dollar’s appreciation.

“The widespread dependency on the dollar leaves the international financial system hostage to the vagaries of US policies, especially the Federal Reserve,” said Eswar Prasad, who has already led the staff of the International Monetary Fund in China and works at Cornell University. “For emerging market economies, in particular, it can create devastating effects on capital flows and exchange rates.”

Source: Infomoney

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