LONDON (Reuters) - The U.S. dollar’s renewed surge and signs that it will build on current 14-year highs are leaving a trail of destruction through world currency markets and forcing policymakers to rethink mechanisms to deal with the fallout.
Currencies from the Indian rupee to the offshore version of the Chinese yuan have hit record lows to the greenback this week, and if history is a guide, another year or two of pain lies ahead for them.
Judging from the U.S. Federal Reserve’s trade-weighted index, past dollar strength episodes have tended to last about seven years. So the current rally, dating from mid-2011 and averaging 4 percent annually, can be expected to run until 2018.
Graphic: Dollar index's 7-year cycles: tmsnrt.rs/2g7ph8E
Graphic: Emerging currencies slide in November tmsnrt.rs/2e7eoml
This month’s move - not yet captured by the Fed’s monthly and weekly data - has been driven by expectations that Donald Trump’s election spells tax cuts, infrastructure spending and an amnesty for corporate dollars parked overseas that will fuel inflation and bring capital flooding into the United States.
That in turn could induce the Federal Reserve into more and faster interest rate rises that will support the dollar as the currency of choice globally for investors seeking better than zero returns for their money.
Analysts at Deutsche Bank, long the most extreme dollar “bull” of the major banks that dominate the $5 trillion a day currency market, spoke this week of a “perfect storm” for the dollar. Strategists at Goldman Sachs dubbed the U.S. election a “reset” for the currency.
The list of dollar victims is growing and economists and policymakers are starting to wonder whether the dollar’s surge could derail the very recovery in demand and inflation that would drive it higher. Emerging markets are vulnerable.
Additional reporting by Nigel Stephenson and Jamie McGeever; editing by Mark Heinrich