The USD has gained serious strength during the last few weeks. Mainly because of a stronger economy and rate hike expectations. The USD index has crossed 100 for the first time since 2015.
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There are two main problems regarding a strong USD.
- Foreign countries have increased their USD positions significantly due to low interest rates.
- Commodities become relatively more expensive if the USD increases, which is bad for commodity importing countries and pushes commodity prices lower.
The graph below shows that USD denominated emerging market debt is about 10% of their GDP. The growth rate has increased after the recession.
This means that emerging markets not only suffer because of more expensive debt, but also because commodity prices are likely to fall.
Oil prices have a very big correlation with the USD. Under current conditions, it is likely that oil prices fall below 40 USD.
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