What’s going on here?
Finance chiefs from the US, Japan, and South Korea are forming a group chat to discuss the threats from a rising US dollar.
What does this mean?
The US dollar’s been strengthening all year – and that’s great news for American tourists abroad, but it’s making for awkward conversations among trading partners. As the greenback strengthens, other currencies weaken, after all. And a severe slump can stress economies like Japan and South Korea: it shrinks their buying power, drives up inflation, and hurts confidence. It’s no wonder these finance ministers are raising their voices. And if their words to support their currencies aren’t enough, they may soon follow suit with actions.
Why should I care?
For markets: The not-so-sweet dollar milkshake.
The dollar milkshake theory explains what happens when there just aren’t enough US dollars to meet a rising demand. As the currency strengthens, countries that carry USD-denominated debt see their repayment costs rise, increasing the risk they’ll miss a payment. The resulting defaults, in turn, boost the dollar’s demand even more, because of its status as a safe haven in times of uncertainty. In worst-case scenarios, the milkshake froths up a global debt crisis, sending other currencies sliding and icing over a lot of portfolios. Luckily, we’re not there yet, and with emerging market economies in relatively fair health, we might not get there.
The bigger picture: They don’t call it “almighty” for nothing.
That group chat might be limited to just the US, Japan, and South Korea, but everyone’s got a stake in the conversation. The US dollar impacts economic activity everywhere and effectively holds the world’s financial system together. As the world’s primary reserve currency, it’s the financial buffer countries use to handle shocks. And because all the major commodities, like oil, are priced in dollars, changes in the currency’s value have far-reaching effects, influencing the cost of goods and services worldwide.
