Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe wi isn't they Joe?
Speaker 1: Have you looked at a chart of the dollar recently?
Speaker 1: It's the only chart I look at. Well, let's but
Speaker 1: if you were going to choose one desert island chart
Speaker 1: right now, the dollar is a pretty good candidate. Yeah.
Speaker 1: That's why I'm only sort of half joking when I
Speaker 1: say it's the only chart that I look at because
Speaker 1: so many, you know, the strong dollar has become the
Speaker 1: sort of like central market story right now, and then
Speaker 1: everything else sort of like trades off of is the
Speaker 1: dollar weak or strong? I think we went a couple
Speaker 1: of days were like paying attention to the British pound,
Speaker 1: but now that kind of seems to be over. No,
Speaker 1: it's really all about It's all about the dollar, and
Speaker 1: it's come off a little bit from its home, but
Speaker 1: it's still very high. Yeah. I was going to say,
Speaker 1: you know, the last time we had an episode specifically
Speaker 1: devoted to the dollar, I think was in the summer,
Speaker 1: and we were kind of joking about top ticking it. Yeah,
Speaker 1: we didn't. We definitely didn't, because it just kept going
Speaker 1: and I think it reached, you know, a record high
Speaker 1: in September, and now, as you mentioned, it's come down
Speaker 1: a little bit, but still incredibly strong, and it's having
Speaker 1: a massive impact on not only markets but real economies
Speaker 1: around the world. Right, That really is the key thing.
Speaker 1: And you know, it's a theme that we've talked about
Speaker 1: for years, even before the pandemic or you know, even
Speaker 1: during a period when the dollar is kind of weak
Speaker 1: or much lower than it is. Dollar cycles are really important,
Speaker 1: both for markets and the real economy. Yeah, and even
Speaker 1: though people write quite a bit about them, I feel
Speaker 1: like they still don't get enough attention paid to them. Weirdly,
Speaker 1: it's like one of those things that I don't know,
Speaker 1: people talk a lot about them, but we should definitely
Speaker 1: talk even more. And when people, or at least you
Speaker 1: and I, but when people think about these dollar cycles
Speaker 1: and the fact they have globally, I feel like there's
Speaker 1: always one name that comes up first. Yes, So on
Speaker 1: that note, we really do have the perfect guests to
Speaker 1: discuss this. Someone who's been on the podcast before talking
Speaker 1: about what the strong dollar means for the global economy,
Speaker 1: someone who has done a lot of academic research on
Speaker 1: this topic, and to this day, whenever you and I
Speaker 1: write about a strong dollar, we always make sure to
Speaker 1: reference his previous papers. So I'm very pleased to say
Speaker 1: we are going to be speaking with Hun Sung Shin.
Speaker 1: He is, of course, the economic advisor and head of
Speaker 1: research at the Bank for International Settlements, and the b
Speaker 1: i S has just published a bulletin all about the
Speaker 1: FX market, with a big portion of it devoted to
Speaker 1: what's going on with the U S currency. So really
Speaker 1: the perfect person. Let's do it, all right, Huan, Thank
Speaker 1: you so much for coming back on all thoughts. Thanks Tray,
Speaker 1: thanks for inviting me back. So you know, I mentioned
Speaker 1: in our intro the chart of the dollar looks like
Speaker 1: if you look at the Bloomberg Dollar Index, for instance,
Speaker 1: it seems to be at a record. Can you maybe
Speaker 1: give us some context about what we're seeing with the
Speaker 1: U S currency? Now? How unusual is this particular moment
Speaker 1: in history? And you know, Joe mentioned that there have
Speaker 1: been strong dollar cycles previously. How is this one similar
Speaker 1: or different? Yeah? Try so that's a great question to
Speaker 1: to kick off with. Um, you know, maybe I can
Speaker 1: go back in time a bit and give you the
Speaker 1: broad sweep here. I mean, if we look back to
Speaker 1: the past fifty years or so, maybe even the past
Speaker 1: forty years, the era of flirting exchange rates. The chart
Speaker 1: for the dollar looks a bit like a w You know,
Speaker 1: we have a peak in the early eighties. In fact,
Speaker 1: it peaked in January, and then it picked again in
Speaker 1: the early two thousand's, and I'll give you some numbers shortly,
Speaker 1: and it's very high currently, So just to give you
Speaker 1: some some magnitude, I think it's worth having some of
Speaker 1: these numbers in our minds as we as we talk
Speaker 1: about this. The BIS publishes a long series on exchange rates.
Speaker 1: It's the b I S Series on Real Effective Exchange Rates.
Speaker 1: So it's a weighted average across all the major bilateral
Speaker 1: exchange rates with respect to a particular currency, and then
Speaker 1: we adjust for inflation relative inflation as well. If we
Speaker 1: go back fifty years and just look at the average
Speaker 1: of the real effective exchange rate for the dollar, the
Speaker 1: average is around it's just over a hundred and ten,
Speaker 1: and in eighty five it reached the hundred and forty five,
Speaker 1: just hundred and forty five. That gives you a sense
Speaker 1: of how strong the dollar was back in eighty five.
Speaker 1: In two thousand two, it peaked around hundred and twenty four,
Speaker 1: and currently it's broken through hundred and forty. So we
Speaker 1: are sort of, you know, we're not quite there in
Speaker 1: terms of level, but we're you know, reasonably close. And
Speaker 1: to give you a sense of the of the troughs,
Speaker 1: there were periods of a weeker dollar as well. The
Speaker 1: first trough, you know, the first trough in the w
Speaker 1: as it were, that comes in the early nineties. It
Speaker 1: reached the low nineties, and then just after the global
Speaker 1: financial crisis it again reached the early the low nineties. Then,
Speaker 1: so there happens some wiggles in the last five or
Speaker 1: six years. But I think it's you know, useful to
Speaker 1: have this kind of broad historical sweep as well. There's
Speaker 1: that famous phrase, and I guess it was former Treasury
Speaker 1: I just had to google it that former Treasury Secretary
Speaker 1: John Connelly stated the dollars our currency, but it's your problem,
Speaker 1: our currency. Your problem is this phrase that gets repeated
Speaker 1: a lot, and I feel like when I think about, well,
Speaker 1: how is it your problem? How is it everyone else's problem?
Speaker 1: Your work in particular, you know, I always think back
Speaker 1: to it, but just just start broadly, how would you
Speaker 1: summarize the strange that it places on the global economy
Speaker 1: when the dollar moves up this rapidly. What we can do, Joe,
Speaker 1: is to highlight some of the roles played by the dollar.
Speaker 1: I mean, it is the premiere international currency, and it
Speaker 1: is the premier currency, uh in pretty much all respects.
Speaker 1: So it is the invoicing currency of choice and international trade.
Speaker 1: It is therefore the trade financing currency as well, quite naturally,
Speaker 1: because if you're invoicing in a particular in a particular currency,
Speaker 1: then the then the trade financing will also be in
Speaker 1: that currency as well. But more broadly, it is a
Speaker 1: currency that figures very highly in reserve holdings, but in
Speaker 1: particular in capital markets and cross border banking as well.
Speaker 1: So it's the, if you like, the funding currency for
Speaker 1: global banking and capital markets. So what that means is
Speaker 1: that you know, if it's a funding currency, it's the
Speaker 1: currency that you borrow in. And therefore it's the currency
Speaker 1: of leverage to some extent. And so when the dollar
Speaker 1: becomes strong, if you like, it's the it's the leverage
Speaker 1: that becomes you more costly. So it's quite natural for
Speaker 1: you to see the pullback and risk appetite if you
Speaker 1: like a reduction in risk taking as well. So there's
Speaker 1: a very strong risk taking element, you know, as the
Speaker 1: as the dollar strengthens, where you know, there's a kind
Speaker 1: of you know, pullback from from mistake, and so a
Speaker 1: stronger dollar has an effect on trade but also on
Speaker 1: financial conditions as well, I think. So that's the kind
Speaker 1: of one sentence, you know summary. Yeah, when we spoke
Speaker 1: to um John Turik in the summer about this on
Speaker 1: the show, you know, he kind of described how the
Speaker 1: dollar works through an economic growth channel given the trade angle,
Speaker 1: and also a liquidity one because the dollar has this
Speaker 1: unusual position in the global financial system where it's a
Speaker 1: safe haven currency. It's considered that and so when you
Speaker 1: get worries about economic growth slowing because of the higher dollar,
Speaker 1: you tend to get more flows into dollar assets, and
Speaker 1: then the dollar goes up even more, so you get
Speaker 1: this kind of cycle. I guess, maybe just one more
Speaker 1: basic question, but why has the dollar been going up?
Speaker 1: Is it all about interest rate differentials and the fact
Speaker 1: that the Fed is hiking or are there other factors
Speaker 1: to it? And you know, I'm thinking specifically about again
Speaker 1: one of the dollar are is very specific or unique
Speaker 1: roles in the world of commodities pricing. I'm certainly the
Speaker 1: relative pace of managree tightening has certainly played a role,
Speaker 1: and you know that's something that we describe in the bulletin.
Speaker 1: If you look at the relative interest rate differentials between
Speaker 1: the US and other countries, we do see a relationship there.
Speaker 1: Where As the interest rate gap widens, we do see
Speaker 1: a an impact on the bilateral exchange rate, so the
Speaker 1: the other currency tends to depreciate more. So I think
Speaker 1: that's a that's a pretty familiar story, and you know
Speaker 1: that is a large part. But I think there is
Speaker 1: also a very important real economy effect here as well.
Speaker 1: If we look at the terms of trade, so roughly,
Speaker 1: you know, how much has the price of your exports
Speaker 1: changed the relative to the price of your imports. A
Speaker 1: very recent development has been that the US has become
Speaker 1: a uh net energy exporter, especially in natural gas. So
Speaker 1: compared to past episodes when a stronger dollar went hand
Speaker 1: in hand with weaker commodity prices, you know, there is
Speaker 1: then this this additional effect that comes from the terms
Speaker 1: of trade as well. So the dollar has moved to
Speaker 1: some extent in line with other commodity exporters, So that's
Speaker 1: the other that's the other factor. And yet a third
Speaker 1: factor would be what you've already mentioned, Tracy, which is
Speaker 1: that as uncertainty is increased, the dollar tends to attract
Speaker 1: your safe haven flows as well. So I think I
Speaker 1: would say all of those are, to some extent, the
Speaker 1: consequence of the unusual sequence of shocks we've had. So
Speaker 1: we had obviously the pandemic, but also the war in
Speaker 1: Ukraine and the and the subsequent impact of commodity prices
Speaker 1: as well. And you can certainly put the monetary policy
Speaker 1: responses also in this context. So I think we have to,
Speaker 1: as it were, have a pretty comprehensive you know, I
Speaker 1: joined that picture of why we are where we are.
Speaker 1: I want to talk more about the commodity angle, because
Speaker 1: that seems like what's really distinct and unusual here. And
Speaker 1: if you, you know, you look at the chart of
Speaker 1: past dollar spikes that you talked about, those were the
Speaker 1: era in which, you know, the US was a big
Speaker 1: oil importer and was not a commodity exporter at all.
Speaker 1: This is a new We're not. We're a huge oil producer,
Speaker 1: as we know, and the whole world is thirsty for
Speaker 1: our natural gas. We're exporting as much as is physically possible.
Speaker 1: How does that change things? And I'm also curious does
Speaker 1: that create a spiral? So I'm thinking about sort of like,
Speaker 1: you know, the Japanese yen, and for a long time
Speaker 1: Japan was a big export powerhouse. Now it actually I
Speaker 1: believe is an importing country, particularly due to energy prices.
Speaker 1: We've seen how much the yen has weakened. Generally, does
Speaker 1: this create like sort of a snowball effect where the
Speaker 1: terms of trade for a country like Japan deterior It's
Speaker 1: the end weekend and then energy prices get even more
Speaker 1: expensive and sort of accelerating the cycle. That is certainly
Speaker 1: one factor, Joe, and the terms of trade effect also
Speaker 1: show up in the in the trade figures as well,
Speaker 1: both for Japan and other other commodity importing areas, and
Speaker 1: I'm thinking of Europe in particular. You know, we do
Speaker 1: see the impact of the energy and food you know,
Speaker 1: price changes, price increases recently. But I think the important
Speaker 1: point here is the invoicing currency role of the dollar.
Speaker 1: The dollar is the invoicing currency for energy, food, as
Speaker 1: well as for manufacturing, by the way, but especially for
Speaker 1: energy and food, because what that means is, if you're
Speaker 1: in Japan or in the r area, you've seen your
Speaker 1: currency depreciate against the dollar, and we know that commodity
Speaker 1: prices have increased even in dollar terms, and so in
Speaker 1: euro or end terms, it's actually increased a lot more.
Speaker 1: And you know, there's a chart in the in the
Speaker 1: bulletin that shows, you know, just roughly than magnitude, and
Speaker 1: what that means is the energy and food prices are
Speaker 1: then incorporated into your inflation figures. And I think the
Speaker 1: important point to mention here, and you've covered this in
Speaker 1: your previous podcasts, energy and food prices. They're really salient
Speaker 1: commodities as far as household behavior is concerned, how shol
Speaker 1: perceptions are concerned, and so they do figure quite importantly
Speaker 1: in how expectations are set. And therefore, you know, how
Speaker 1: you know, behavior changes as well, and so perhaps even
Speaker 1: more than other traded goods, if you see this very
Speaker 1: sharp increase in commodity prices, especially in your own currency,
Speaker 1: I feel like that would have a disproportionate effect on inflation,
Speaker 1: you know, domestically and the way that inflation is perceived.
Speaker 1: What's different this time is that typically you know, historically
Speaker 1: we see commodity prices weakening as the dollar strengthens. I mean,
Speaker 1: there's a very you know well as published relationship, historical
Speaker 1: relationship where a strong dollar goes hand in hand with
Speaker 1: weaker commodity prices. What's different this time is that, you know,
Speaker 1: given the shocks, given the nature of the shocks, we
Speaker 1: have this conjunction of a stronger dollar and higher commodity
Speaker 1: prices due to the war in Ukraine, for example, and
Speaker 1: that combination, which is a very unusual one, has had
Speaker 1: an effect in raising the food and energy prices in
Speaker 1: other currencies a lot more than it did in the past. Right,
Speaker 1: So normally you would have this inverse correlation between the
Speaker 1: dollar and commodities, especially oil, and if the dollar went up,
Speaker 1: you would expect oil prices to go down. But that's
Speaker 1: not happening this time around. Can you talk a little
Speaker 1: bit more about what that means for countries that are importing,
Speaker 1: you know, a lot of food and energy, because I
Speaker 1: think it's pretty important. Yes, it is very important, and
Speaker 1: clearly it is a negative shock to your terms of trade.
Speaker 1: It raises the price of food, it raises the price
Speaker 1: of energy in your domestic currency. And so that will
Speaker 1: feed into inflation. So it's a bit of a bit
Speaker 1: of an unpleasant set of shocks there. We see, for example,
Speaker 1: that the economies that are very geared towards manufacturing have
Speaker 1: seen a worsening of their trade balance, you know, as
Speaker 1: the terms of trade have moved against them. And it's
Speaker 1: also true that as the exchange rates in these countries
Speaker 1: have also depreciated relative to the dollar, that's also been
Speaker 1: an unwelcome factor in raising inflation as well. Because of
Speaker 1: the very unusual sequence, very unusual combination of shocks, it
Speaker 1: has been a double valny. Can you talk a little
Speaker 1: bit more about what it means from a policy perspective?
Speaker 1: Four countries that are faced with this unusual series of shocks,
Speaker 1: So there is high inflation, but much of it in
Speaker 1: areas that they probably can't control, you know, the global commodities.
Speaker 1: What does it mean in terms of policy space? That
Speaker 1: are different countries, haven't you know? We all vols seeing
Speaker 1: the end charge and it looks like maybe there has
Speaker 1: been some intervention at some point, but you know, it's
Speaker 1: limited and it's sort of ambiguous. But what is it
Speaker 1: due to policy makers in countries that are faced with
Speaker 1: this series of shocks. Yeah, I think that's a very
Speaker 1: good question, Joe, and I suppose the first order of
Speaker 1: business is to is to address the inflation that is underlying.
Speaker 1: If you like the it actually sets the terms of
Speaker 1: the trade off for all these other policy questions. Even
Speaker 1: if the source of the inflation is these higher energy
Speaker 1: and food prices, we know from historical experience, at once
Speaker 1: that gets entrenched, it will feed into expectations about, you know,
Speaker 1: how inflation will develop in the future. It's going to
Speaker 1: get much more difficult to to bring inflation down. And
Speaker 1: and just to give you a sense of how that
Speaker 1: process has has progressed, we know and you've been covering
Speaker 1: this in your podcast a lot. In the early days
Speaker 1: of the shock, uh, you know, just off you know,
Speaker 1: just as we were talking about supply chains, it seemed
Speaker 1: that the price increases were limited to you know, certain
Speaker 1: good sectors. Some of the work of the b I
Speaker 1: S we we also follow that pretty closely. But what
Speaker 1: we've seen is that there's been a broadening out of
Speaker 1: inflation over the subsequent months. We've seen the core inflation
Speaker 1: measure also move up. And this is global energy as well,
Speaker 1: and this is global so this is a phenomenon that
Speaker 1: we're seeing in every country, which is not just high
Speaker 1: inflation now just headline inflation, but this broadening effect of
Speaker 1: across goods and services. Yeah, exactly, and we see it
Speaker 1: in core inflation. And this is true outside the US
Speaker 1: as well. So irrespective of the source of the shock,
Speaker 1: you know, once inflation it gets entrenched, we know there's
Speaker 1: going to be very difficult to bring it down. So
Speaker 1: addressing inflation would be certainly, you know, the first order
Speaker 1: of business. But as you're doing that, I think there
Speaker 1: are other things one can do to mitigate some of
Speaker 1: the effects of a stronger dollar, especially if it affects
Speaker 1: your financial markets. So we know, as we you know,
Speaker 1: spoke just earlier, one of the very you know, well
Speaker 1: established effects of a stronger dollar is that it tightens
Speaker 1: financial conditions. You know, it is the global funding currency,
Speaker 1: it's the currency that you borrow, and therefore it's the
Speaker 1: currency of leverage. So stronger dollar tends to go hand
Speaker 1: in hand with the leveraging if you like, a recoiling
Speaker 1: from risk taking, and that manifests itself in you know,
Speaker 1: not only hanking sector flows bank lending, but also in
Speaker 1: capital markets. You see for example, spreads on corporate bonds
Speaker 1: go up as a dollar strengthens, And there's a chart
Speaker 1: in the bulletin, but I think illustrates that quite quite strikingly.
Speaker 1: And we also have very good evidence that it affects
Speaker 1: the shadow price of intermediary balance sheet if you like.
Speaker 1: So you know when you when you speak to Salt
Speaker 1: and Posts or or Perry Merlin, you know they I
Speaker 1: think have a very similar sort of approach to the US.
Speaker 1: There is a there is a sort of marginal cost
Speaker 1: of balance sheet we tend to observe, for example, through
Speaker 1: the deviation from covered interest parity. The ffect spaces spread,
Speaker 1: for example, is that that spread goes up when the
Speaker 1: daughter is stronger, which is a kind of tell tale
Speaker 1: sign that pattern shoot is becoming more expensive. And so
Speaker 1: for all these reasons, if the tightening of financial conditions
Speaker 1: gets excessive, and you know, it might sort of trigger
Speaker 1: episodes of stress, and then of course there are ways
Speaker 1: of mitigating that kind of stress. I think central banks
Speaker 1: have and how the tools to do that. You can
Speaker 1: mitigate that partly by in a supplying liquidity in a
Speaker 1: very sort of strategic way, but also effects intervention to
Speaker 1: as we'll lean against the wind is another way to
Speaker 1: address partly this kind of you know, you know, the
Speaker 1: tightening of financial conditions as well. This is what I
Speaker 1: wanted to ask you about. Like we used to worry
Speaker 1: about competitive devaluation in years since two thousand eight, But
Speaker 1: should we be worried about competitive I guess it interventions
Speaker 1: now people trying to strengthen their currency against the dollar.
Speaker 1: And how sustainable are those types of moves? You know,
Speaker 1: I can see some parts of the argument, but why
Speaker 1: a strongervelop might lead to you know, high interest rates
Speaker 1: and other jurisdictions you know, higher than pactic could be
Speaker 1: you know, in the absence of a stronger dollar. But
Speaker 1: I'm not sure that that the argument sort of fully
Speaker 1: comes around to a conclusion that you know, this leads
Speaker 1: to kind of competitive strengthening. So one part that certainly
Speaker 1: does you know, make some sense is the idea that
Speaker 1: you know, as the dollar strengthens, it raises the local
Speaker 1: currency price of food and energy, and that certainly has
Speaker 1: an effect on domestic inflation for the reasons that we discussed,
Speaker 1: so that has to be met by a monetary policy
Speaker 1: response domestically, So there would be a tightening there, but
Speaker 1: for a kind of feedback loop to be established. You
Speaker 1: you need some some kind of way of completing that circle.
Speaker 1: And I think that additional step for us it is
Speaker 1: not as clear. If anything, you would imagine that, you know,
Speaker 1: the quartation goes the other way. So as the global
Speaker 1: economy weakens, you might you know, see the fair sort
Speaker 1: of moderating, you know, if if there is a demand
Speaker 1: spill over. But clearly this is something that you know,
Speaker 1: we need to keep an eye on. It's certainly a
Speaker 1: departure from the usual story about competitive devaluations, you know,
Speaker 1: currency wars in the traditional sense. But I think the
Speaker 1: the you know, the effects are pretty multifaceted here. And
Speaker 1: if we just look at some of the more recent
Speaker 1: events and in capital markets that you mentioned that the
Speaker 1: dollar has sort of slightly topped out now in the
Speaker 1: last few days, but more generally, if we look at
Speaker 1: the monetary policy responses around the world, I would say that,
Speaker 1: you know, there are sort of signs that this kind
Speaker 1: of reverse currency wars scenario probably isn't you know, as
Speaker 1: strong as you know, we might have fooled and so yeah,
Speaker 1: so I would accept some parts of that, but probably
Speaker 1: wouldn't embrace it. Holy So you mentioned you know, you
Speaker 1: referenced our conversation recently with Resulting and Period that was
Speaker 1: about the future of the dollar. But I actually want
Speaker 1: to sort of look backwards for a second, because you know,
Speaker 1: as you talk about, as we've been discussing, the dollar
Speaker 1: is the invoice and currency, It's the funding curacy currency,
Speaker 1: it's the everything currency, it's the borrowing currency. When you
Speaker 1: look back, either it's sort of real activity or um
Speaker 1: borrowing and hard currency for other countries. Over the last
Speaker 1: few years, has there been any change to the trajectory
Speaker 1: of the importance of the dollar or has it been
Speaker 1: sort of just going from strength to strength in terms
Speaker 1: of its role in the world economic Well, Joe, I
Speaker 1: think I can sort of give you some hard numbers
Speaker 1: here because as well as the bulletin, we we have
Speaker 1: just come out with the BIS triannual survey. Every three
Speaker 1: years we do a pretty you know, thorough stoptake of
Speaker 1: what's going on in the effects market particular, but also
Speaker 1: in the interest ructor of this market. But let's focus
Speaker 1: on the effects market. So we do a pretty you know,
Speaker 1: detailed stock take. We gather data from all our part
Speaker 1: per central banks, but we have a pretty good take
Speaker 1: and We've just come out with the latest Triangle survey
Speaker 1: and the answer is not much has changed. If anything,
Speaker 1: the role of the dollar has has strengthened somewhat. So
Speaker 1: just to give you some some broad numbers here, the
Speaker 1: headline number is that of all effex transactions have the
Speaker 1: dollar on one side, So you know, it's a it's
Speaker 1: a pretty big number. And that was the same in
Speaker 1: our last Triangle survey back in and the other currencies,
Speaker 1: I mean they pretty much were trading water in that respect,
Speaker 1: the Euro, the n seventeen, the pound, sterling, so that's
Speaker 1: you know, pretty much you know what they were last
Speaker 1: time around. The remin b has gone. It went up
Speaker 1: from four percent in UH in twenty nine to seven
Speaker 1: percent this year, so there's a sort of a marginal
Speaker 1: take up in the m MB, but on the scale
Speaker 1: of things still seems you know, this is uh you know,
Speaker 1: it's pretty small. And you know, for those listeners who say, well,
Speaker 1: how come these numbers add up to more than a hundred,
Speaker 1: We'll remember we are talking about a currency being on
Speaker 1: one side of a transaction, right, so you know, in theory,
Speaker 1: if you add it all up, it'll add up to two.
Speaker 1: That's a useful footnote, that is a useful This will
Speaker 1: help us with Twitter people. I realized that because absolutely
Speaker 1: it took me. I realized then halfway through. But at
Speaker 1: first I was like, wait a second eight plus thirteen
Speaker 1: plus seven, and it took me. But then I got absolutely,
Speaker 1: but that's useful for no. Yeah, and Joe, maybe you know,
Speaker 1: just to finish the thought, so, why might it be
Speaker 1: the case that you know, there is this very if
Speaker 1: you're like resilient role for the dollars, the premier international currency,
Speaker 1: what if you think about how the pieces fit together?
Speaker 1: And I think we talked about this in one of
Speaker 1: our previous conversations. All the pieces support the other pieces,
Speaker 1: So you know, think about starting from invoicing. So if
Speaker 1: you're in the voice in the dollar, then it makes
Speaker 1: sense to finance trade financing, you know, in dollars, because
Speaker 1: you're going to be receiving you dollar cash flows. And similarly,
Speaker 1: if you're going to make an investment and the cash
Speaker 1: flows in dollars, then of course it makes sense to
Speaker 1: borrow in dollars because you know, you want to eliminate
Speaker 1: at least one of the you know, the the uncertainties
Speaker 1: between your obligations and income in cash, so you tend
Speaker 1: to borrow in dollars even if you're not located in
Speaker 1: the United States. And if that's the case, then the
Speaker 1: capital markets, you know, will have a preponderance of dollar instruments,
Speaker 1: and which is you know, you know exactly what we see.
Speaker 1: So the capital market development will very much follow in
Speaker 1: the wake of these currency decisions. You know, asset managers
Speaker 1: pretty much will have a preponderance of dollar securities, you know,
Speaker 1: dollar assets more generally. And you know, if you're a
Speaker 1: pension fund or a life insurance company from a non
Speaker 1: dollar jurisdiction, you know, you're limited in your domestic currency instruments,
Speaker 1: and so in your portfolio there's going to be a
Speaker 1: very large chunk of you know, dollar denominated assets. And
Speaker 1: so if that's the case, then you have to find
Speaker 1: a way of hedging the currency risk, because your obligations
Speaker 1: to your beneficiaries, your obligations to your policy holders are
Speaker 1: going to be in your domestic currency rather than in dollars.
Speaker 1: And so there's a there's a role for dollar hedging.
Speaker 1: There's a hedging for the dollar risk, which means that
Speaker 1: you know, you would take up you know, swaps with
Speaker 1: the global banks and the global banks are if you like,
Speaker 1: lending you dollars short term, and of course they would
Speaker 1: need to source those dollars in global capital markets, and
Speaker 1: so the the global banking system, the global capital markets.
Speaker 1: There's a very good reason why that's a very heavy
Speaker 1: dollar ecosystem, because it builds on all these previous steps,
Speaker 1: and so as you know, one layer is supported by
Speaker 1: the layer beneath, the whole thing sort of you know,
Speaker 1: hangs together. It's going to be, you know, very difficult
Speaker 1: to see how that kind of arrangement would would change.
Speaker 1: Perhaps over the very very long run, you know, we
Speaker 1: would see its possibly some changes at the margin, but
Speaker 1: it's going to be something which you know has inherent
Speaker 1: I feel like resilience because of this mutually reinforcing layer,
Speaker 1: the layers of the global financial system. You know, you
Speaker 1: mentioned the impact of a stronger dollar on global financial
Speaker 1: conditions historically, given its centrality in global trade, and I
Speaker 1: wanted to ask you. In the bulletin, there's a line
Speaker 1: that says, more generally, it's unclear whether the impacts of
Speaker 1: things in the dollar exchange rate on global financial conditions
Speaker 1: is now stronger or weaker than in the past. Can
Speaker 1: you explain that a little more like what potentially has
Speaker 1: changed here. So what we were thinking of in that
Speaker 1: passage is that, you know, we have to distinguish between
Speaker 1: the aggregate impact given the size of the rise in
Speaker 1: the dollar index, versus the point for point impact. So
Speaker 1: you know, as one point goes up in the broad
Speaker 1: dollar index, how does that affect financial conditions? So clearly,
Speaker 1: given the very large moves, we have seen quite substantial
Speaker 1: impact across the board. But what we had in mind
Speaker 1: in that paragraph was really about the you know, the
Speaker 1: point by point impact, and there I think we do
Speaker 1: see some interesting things this time around. So, you know,
Speaker 1: on the one hand, it's certainly the case that emerging
Speaker 1: markets are much more resilient or seems to be much
Speaker 1: more resilient this time around. And if anything, it's it's
Speaker 1: advanced economies that have really been perhaps more affected by
Speaker 1: tightening global financial conditions. So one one way to think
Speaker 1: about the emerging market story here is, first of all,
Speaker 1: if we look at the changes in the bilateral exchange rate,
Speaker 1: it is very telling, for example, that the Brazilian real
Speaker 1: and the Mexican paco have actually appreciated relative to the
Speaker 1: dollar this year, and that's really how to turn up
Speaker 1: for the books. You know, when you typically think back
Speaker 1: to two recent periods of dollar strength, in particular that
Speaker 1: period in the in the middle of the sixteen that
Speaker 1: was an episode when a strong dollar hit the emerging
Speaker 1: markets particularly hard and also actually commodities. You know, that
Speaker 1: was a period when when all reached very very low levels.
Speaker 1: So the emerging markets are actually doing reasonably well this
Speaker 1: time around. And we also see it in the spreads
Speaker 1: of domestic currency sovereign bonds issued by emerging markets. I mean,
Speaker 1: there's a chart in the in the bulletin at you know,
Speaker 1: it's been a quite a striking way that when you
Speaker 1: look at advanced the economy corporate bonds, or indeed the
Speaker 1: dollar denominated bonds of of emerging markets, we have the
Speaker 1: usual story where a stronger dollar has gone hand in
Speaker 1: hand with higher bond spreads. But the one exception is
Speaker 1: the local currency emerging market sovereign bonds. I mean, they're
Speaker 1: the spread had actually come in, and so that's another
Speaker 1: sense in which emerging markets have actually done pretty well.
Speaker 1: And I think part of this story is the fact
Speaker 1: that the emerging markets started to you know tighten earlier.
Speaker 1: You know, they anticipated what was coming down the road. Um,
Speaker 1: you know, Brazil started to tighten quite early last year
Speaker 1: and you know, quite quite far as well, say with Mexico,
Speaker 1: although to a lesser extent an emerging markets have actually
Speaker 1: you know, learned a lesson. I think one of the
Speaker 1: good stories to come out of this current episode is
Speaker 1: the emerging markets have been a bright spot relative to
Speaker 1: you know, all the other difficulties that the globally economy
Speaker 1: is facing. Just looking at the in the bulletin and
Speaker 1: I'm looking at the third chart, in particular the changes
Speaker 1: in terms of trades since January twenty two, and I
Speaker 1: mean part of the story is just that Europe, the
Speaker 1: euro Area and Japan are extremely dependent on foreign sources
Speaker 1: of energy, particularly guess and of course we all know
Speaker 1: the story with the pipelines into Europe and Japan's lack
Speaker 1: of domestic energy production. How much when we look at
Speaker 1: that other chart showing in particular the extremely strong performance
Speaker 1: of the Brazilian rail is it a sort of simple
Speaker 1: terms of trade story. I think the terms of trade
Speaker 1: definitely have a role to play, but it's also I
Speaker 1: think the monetary policy story as well, So you know,
Speaker 1: I should certainly have mentioned in terms of trade effect
Speaker 1: for Brazil as well. I mean, there's a scattered chart
Speaker 1: in the bulletin that shows that you know, those you know,
Speaker 1: those countries that tighten more relative to the US, you know,
Speaker 1: those are the ones that have actually maintained the currency values.
Speaker 1: There are lots of other effects going on, So this
Speaker 1: is by no means a clean relationship. But yeah, I
Speaker 1: see like Canada is relatively better and also one of
Speaker 1: the sort of of the you know, of the sort
Speaker 1: of dirtier shirts, one of the countries that it looks
Speaker 1: like it's tighten more than some of the others. Yeah,
Speaker 1: and of course Canada is a very large oil produced
Speaker 1: as well. So this is the big question, and I
Speaker 1: feel like I've asked it a couple of times this year,
Speaker 1: But is there a point at which a strong dollar
Speaker 1: becomes problematic for the U S economy itself? Despite you know,
Speaker 1: the uniqueness of the role of the U. S currency
Speaker 1: in the global financial system and despite the energy independence
Speaker 1: which Joe was just talking about. That's a great question, Tracy.
Speaker 1: You know that that definitely are consequences. I think these
Speaker 1: two is how much of the impact of the dollar
Speaker 1: globally will then spill back to the US. And and
Speaker 1: here I think the demand channel certainly will be one
Speaker 1: if you have a week of global economy that's certainly
Speaker 1: not not good news for the US economy either. And
Speaker 1: this is why actually the reverse currency war stories you know,
Speaker 1: needs to be you know, somewhat modified, because but that
Speaker 1: sort of feedback loop to hold, there has to be
Speaker 1: something that completes the circle. And it's perhaps not as
Speaker 1: you know obvious, you know, as it could be there
Speaker 1: now in spite of everything, though, I mean, I would
Speaker 1: just go back to what I was saying earlier on
Speaker 1: on some of the policy implications. You know, I think
Speaker 1: the first order of business has to be inflation, because
Speaker 1: you know that from that we know that once inflation
Speaker 1: gets entrenched, you know that that will be much more
Speaker 1: difficult to dislodge. But it does mean that, you know,
Speaker 1: as we tackle inflation globally, there are some of these
Speaker 1: collateral effects that will definitely in a way on US
Speaker 1: as demand slows, as in particular in those countries with
Speaker 1: very high dead levels, in particular very high household debt levels,
Speaker 1: as rates go up, you know that will actually have
Speaker 1: pre you rapidly you know, cooling effect on demand as well,
Speaker 1: and also perhaps financial stability issues that are coming up.
Speaker 1: So if you think about those kinds of I feel
Speaker 1: like financial stability challenges, financial stability if like trip wires
Speaker 1: that might be lurking, I think we just have to
Speaker 1: be much more vigilant about seeing where the fault lines
Speaker 1: might be lurking and address them in a way that
Speaker 1: the policy framework as a whole is going to give
Speaker 1: us something you know, fairly coherent. So you know, it
Speaker 1: would not be a good idea if you're tightening with
Speaker 1: one hand but then loosening with the other, you're going
Speaker 1: to be, you know, intervening in markets. It had better
Speaker 1: be you know, fairly well focused, with a very you know,
Speaker 1: tightly defined rationale for why you're doing it. I think
Speaker 1: it's especially important in in the current period because, as
Speaker 1: we discussed earlier, the rest taking channel me means that
Speaker 1: the global funding currency roll of the dollar means that
Speaker 1: you know, there are constraints that are kicking in earlier,
Speaker 1: and you know they may interact in very complex ways,
Speaker 1: and so there are trip wires strewn all over the
Speaker 1: place that we need to be tiptoeing around very carefully
Speaker 1: as well. So so even as we were addressing inflation,
Speaker 1: you know, that's job number one. We have to keep
Speaker 1: a very close eye on what else might go wrong.
Speaker 1: I suppose, you know, we we now have a lot
Speaker 1: of experience after the GFC on how to address you know,
Speaker 1: specific market stresses, and I think it is fair to
Speaker 1: say these are primarily about capital markets and non bank
Speaker 1: financial intermediaries rather than the banking sector. You know, we
Speaker 1: can be happy that at least the banking sector looks
Speaker 1: a lot stronger than before the GFC, but still the
Speaker 1: capital markets and non bank financial intermediaries, these nb f
Speaker 1: I s in the jargon, they have have channels of
Speaker 1: transmission that we're not always familiar with. I think the
Speaker 1: recent experience in the UK is a very good example
Speaker 1: of that. So while we are actually addressing with inflation
Speaker 1: and the conducting monetary policy in the best way, and
Speaker 1: that's you know, taking into account the spillbacks as well
Speaker 1: as spillovers, we have to be extremely vigilant on what
Speaker 1: else is going on because there are trip wires, you know,
Speaker 1: strewn on the floor, as it were, and they are
Speaker 1: those types of things that can be easily missed. Who
Speaker 1: have to be vigilant. I have one more question, which
Speaker 1: is what could actually break the dollar doom loop that
Speaker 1: we've sort of been describing, because you know, in normal times,
Speaker 1: I think one of the accepted ways that dollar strength
Speaker 1: would kind of peter out would be the rest of
Speaker 1: the world starts exporting more goods to the US to
Speaker 1: take advantage of, you know, the stronger currency, and eventually
Speaker 1: that kind of hits US domestic growth and that would
Speaker 1: cause the dollar to weaken. But as you well know,
Speaker 1: we aren't in normal times, and you know, Europe is
Speaker 1: disrupted by energy shortages, and China is still disrupted by
Speaker 1: COVID lockdowns and things like that. So there seems to
Speaker 1: be a big question mark over whether or not the
Speaker 1: normal economic patterns would apply well. Tracy, I think, you know,
Speaker 1: even in normal times, a story that a depreciation would
Speaker 1: actually stimulate exports and therefore that's going to be pulling
Speaker 1: the economy to stronger activity. I think even in normal
Speaker 1: times that mechanism you know, wasn't wasn't quite right. We
Speaker 1: know that the influence of dollar invoicing also extends to
Speaker 1: the impact on trade balances as well. If your price
Speaker 1: is sticky in dollar terms, your export price has done
Speaker 1: it just very much, but the dollar invoice goods domestically,
Speaker 1: you know, will rise in domestic currency terms, and so
Speaker 1: that has a immediate effect on consumption. So typically what
Speaker 1: we see is that a stronger dollar goes hand in
Speaker 1: hand with both weaker exports and the weaker imports. Weaker
Speaker 1: imports much more strongly felt. And in addition, there are
Speaker 1: these you know, financial channels that that operate what would
Speaker 1: break the current episode. I think, you know, if we
Speaker 1: can get inflation under control, and if we can see
Speaker 1: inflation you know, visibly coming under control, we see a
Speaker 1: path back to target that's going to undoubtedly influence the
Speaker 1: thinking behind monetary policy actions around the world. And for
Speaker 1: the reasons that we discussed. You know, the monetary policy
Speaker 1: actions in one country will definitely affect those in other countries,
Speaker 1: and to the extent that the exchange rates will also
Speaker 1: move as the path of monetary policy, you know, adjust
Speaker 1: way into the future. That's going to affect exchange rates
Speaker 1: in particular, but as a prices more generally. I'm less
Speaker 1: pessimistic than than some other commentators that you know you've
Speaker 1: had on your podcast in that you know, on once
Speaker 1: we get inflation under control, you know, that's the key
Speaker 1: if you like. So, if you think that we've been
Speaker 1: in some kind the you know, vicious spiral, getting inflation
Speaker 1: under control will allow us to convert that vicious spiral
Speaker 1: into virtuous spiral. And you know, this could happen much
Speaker 1: more quickly than than you know, many of us, you know,
Speaker 1: could imagine. So you know, as you know, Joe, I mean,
Speaker 1: things move very very quickly in financial markets, and so
Speaker 1: I think, you know, once we see that, once we
Speaker 1: see the light at the end of the tunnel, that's
Speaker 1: going to change the general complexion of the discussion. I
Speaker 1: would say, I like that optimistic end. Yeah, there's a
Speaker 1: chance that maybe it's the head wind turns into a
Speaker 1: tail wind. All right, Well, we could easily talk to you,
Speaker 1: you know, for another hour on this, but thank you
Speaker 1: so much for coming back on the show. And you know,
Speaker 1: if you're a listener who is interested in this, please
Speaker 1: check out the bulletin from the b I S and
Speaker 1: some of Juan's previous academic work as well. Thanks Tracy,
Speaker 1: Thanks Joe, thank you so much. Always great conversation. Yeah, great, thanks,
Speaker 1: thanks you and really appreciate it. So, Joe, I thought
Speaker 1: it was great to get that kind of historical and
Speaker 1: nuanced perspective on this issue. Because it is true with currencies,
Speaker 1: it tends to bring out a lot of emotions and
Speaker 1: strong opinions on either side. I would say there's so
Speaker 1: much good. I mean, first of all, it is interesting
Speaker 1: and novel, this idea of a dollar up cycle in
Speaker 1: a commodity up cycle at the same time. So to
Speaker 1: start like, that's just a really interesting phenomenon that's going
Speaker 1: on that makes this moment different than the other. I also,
Speaker 1: obviously I liked when Hughan sort of talked about I
Speaker 1: guess maybe you'd call it the interlocking puzzle pieces or
Speaker 1: the layers of dollar dominant. You start with invoicing, that
Speaker 1: leads to hedging, that leads to you know, you invest
Speaker 1: in dollars you need to, you know, borrowing dollars, you know,
Speaker 1: to avoid f X risk, and then that leads into
Speaker 1: the question of, well, if there are different components of
Speaker 1: dollar positioning, you get in the situation in which the
Speaker 1: financial trip lawyers break before the real economy cools down. Yeah.
Speaker 1: I thought that was a really important point. And also,
Speaker 1: you know, we kind of touched on this with John
Speaker 1: Turk as well. But the idea that when we talk
Speaker 1: about something breaking in the market. You know, the idea
Speaker 1: of the FED hiking until something breaks has become something
Speaker 1: of a trope or a meme at the moment. But
Speaker 1: it's really like something that would cause something in the
Speaker 1: US to break, because to some extent we've already seen
Speaker 1: things internationally start to break down, like, for instance, the
Speaker 1: b o J having to intervene in the end and
Speaker 1: things like that, the Bank of England UM and the
Speaker 1: situation in the UK. So the thing that we're kind
Speaker 1: of looking for is the trip wire that ends up
Speaker 1: impacting the US directly. You know. I also think just
Speaker 1: and again listeners should go check out the new B
Speaker 1: I S bulletin out today. But this idea of like,
Speaker 1: it's unusual that it's the e M countries the currencies,
Speaker 1: and not just the currencies, because I kind of knew
Speaker 1: that on the currency front, but the spreads on domestic
Speaker 1: bonds also being staying pretty tame and not blowing out
Speaker 1: the same way that we're seeing and say the UK
Speaker 1: or Germany and elsewhere. I think that's also an interesting phenomenon,
Speaker 1: And of course there are multiple drivers of that, both
Speaker 1: the terms of trade and the fact that many of
Speaker 1: these countries actually got a jump start on the hiking,
Speaker 1: so very interesting dimensions to this dollar rally. Absolutely all
Speaker 1: right on that note, shall we leave it there? Let's
Speaker 1: leave it there. This has been another episode of the
Speaker 1: All Thoughts podcast. I'm Tracy Halloway. You can follow me
Speaker 1: on Twitter at Tracy Halloway, and I'm Joe Wisenthal. You
Speaker 1: can follow me on Twitter at the Stalwart. Please follow
Speaker 1: our guest Hunsong Shin. He's at hun Soong Shin. Follow
Speaker 1: our producers Kermen Rodriguez at Kermen Armin and Dashel Bennett
Speaker 1: at Dashbot. And check out all of our podcasts at
Speaker 1: Bloomberg under the handle at podcasts. And be sure to
Speaker 1: check out the Bloomberg odd Logs newsletter. Go to Bloomberg
Speaker 1: dot com slash odd Lodge. It's a blog that Tracy
Speaker 1: and I have right there pretty regularly, post trade in scripts,
Speaker 1: and once a week we also do a newsletter on
Speaker 1: the various topics that we talk about. I'm here and
Speaker 1: anything else that's on our mind. Thanks for listening.