WEBVTT - Hyun Song Shin Explains Why This Dollar Shock Is So Unique 0:00:10.039 --> 0:00:13.440 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.480 --> 0:00:16.400 I'm Tracy Alloway and I'm Joe wi isn't they Joe? 0:00:16.440 --> 0:00:19.479 Have you looked at a chart of the dollar recently? 0:00:20.280 --> 0:00:22.720 It's the only chart I look at. Well, let's but 0:00:23.040 --> 0:00:25.480 if you were going to choose one desert island chart 0:00:25.560 --> 0:00:27.840 right now, the dollar is a pretty good candidate. Yeah. 0:00:27.880 --> 0:00:30.040 That's why I'm only sort of half joking when I 0:00:30.080 --> 0:00:32.360 say it's the only chart that I look at because 0:00:32.840 --> 0:00:36.280 so many, you know, the strong dollar has become the 0:00:36.360 --> 0:00:40.000 sort of like central market story right now, and then 0:00:40.120 --> 0:00:42.479 everything else sort of like trades off of is the 0:00:42.520 --> 0:00:45.040 dollar weak or strong? I think we went a couple 0:00:45.040 --> 0:00:47.160 of days were like paying attention to the British pound, 0:00:47.240 --> 0:00:48.880 but now that kind of seems to be over. No, 0:00:49.000 --> 0:00:51.800 it's really all about It's all about the dollar, and 0:00:51.840 --> 0:00:53.440 it's come off a little bit from its home, but 0:00:53.440 --> 0:00:55.400 it's still very high. Yeah. I was going to say, 0:00:55.480 --> 0:00:58.800 you know, the last time we had an episode specifically 0:00:58.840 --> 0:01:00.960 devoted to the dollar, I think was in the summer, 0:01:01.000 --> 0:01:03.440 and we were kind of joking about top ticking it. Yeah, 0:01:03.440 --> 0:01:06.080 we didn't. We definitely didn't, because it just kept going 0:01:06.240 --> 0:01:08.160 and I think it reached, you know, a record high 0:01:08.319 --> 0:01:11.119 in September, and now, as you mentioned, it's come down 0:01:11.120 --> 0:01:15.000 a little bit, but still incredibly strong, and it's having 0:01:15.040 --> 0:01:18.479 a massive impact on not only markets but real economies 0:01:18.520 --> 0:01:21.480 around the world. Right, That really is the key thing. 0:01:21.680 --> 0:01:23.479 And you know, it's a theme that we've talked about 0:01:23.480 --> 0:01:26.959 for years, even before the pandemic or you know, even 0:01:27.040 --> 0:01:29.119 during a period when the dollar is kind of weak 0:01:29.200 --> 0:01:33.280 or much lower than it is. Dollar cycles are really important, 0:01:33.400 --> 0:01:35.880 both for markets and the real economy. Yeah, and even 0:01:35.920 --> 0:01:38.160 though people write quite a bit about them, I feel 0:01:38.200 --> 0:01:41.880 like they still don't get enough attention paid to them. Weirdly, 0:01:42.000 --> 0:01:44.039 it's like one of those things that I don't know, 0:01:44.120 --> 0:01:46.160 people talk a lot about them, but we should definitely 0:01:46.200 --> 0:01:49.480 talk even more. And when people, or at least you 0:01:49.520 --> 0:01:52.640 and I, but when people think about these dollar cycles 0:01:52.640 --> 0:01:54.720 and the fact they have globally, I feel like there's 0:01:54.720 --> 0:01:58.080 always one name that comes up first. Yes, So on 0:01:58.120 --> 0:02:00.880 that note, we really do have the perfect guests to 0:02:00.960 --> 0:02:03.960 discuss this. Someone who's been on the podcast before talking 0:02:04.000 --> 0:02:06.680 about what the strong dollar means for the global economy, 0:02:06.760 --> 0:02:09.200 someone who has done a lot of academic research on 0:02:09.200 --> 0:02:11.880 this topic, and to this day, whenever you and I 0:02:11.960 --> 0:02:14.640 write about a strong dollar, we always make sure to 0:02:14.680 --> 0:02:18.040 reference his previous papers. So I'm very pleased to say 0:02:18.160 --> 0:02:20.240 we are going to be speaking with Hun Sung Shin. 0:02:20.560 --> 0:02:23.640 He is, of course, the economic advisor and head of 0:02:23.680 --> 0:02:26.840 research at the Bank for International Settlements, and the b 0:02:26.960 --> 0:02:30.320 i S has just published a bulletin all about the 0:02:30.360 --> 0:02:33.200 FX market, with a big portion of it devoted to 0:02:33.400 --> 0:02:36.080 what's going on with the U S currency. So really 0:02:36.120 --> 0:02:39.119 the perfect person. Let's do it, all right, Huan, Thank 0:02:39.120 --> 0:02:41.600 you so much for coming back on all thoughts. Thanks Tray, 0:02:41.919 --> 0:02:45.400 thanks for inviting me back. So you know, I mentioned 0:02:45.720 --> 0:02:49.200 in our intro the chart of the dollar looks like 0:02:49.320 --> 0:02:51.800 if you look at the Bloomberg Dollar Index, for instance, 0:02:51.840 --> 0:02:53.880 it seems to be at a record. Can you maybe 0:02:53.960 --> 0:02:57.440 give us some context about what we're seeing with the 0:02:57.560 --> 0:03:01.840 U S currency? Now? How unusual is this particular moment 0:03:01.960 --> 0:03:04.800 in history? And you know, Joe mentioned that there have 0:03:05.000 --> 0:03:08.520 been strong dollar cycles previously. How is this one similar 0:03:08.760 --> 0:03:12.200 or different? Yeah? Try so that's a great question to 0:03:12.200 --> 0:03:14.720 to kick off with. Um, you know, maybe I can 0:03:15.000 --> 0:03:16.680 go back in time a bit and give you the 0:03:16.680 --> 0:03:20.160 broad sweep here. I mean, if we look back to 0:03:20.240 --> 0:03:24.680 the past fifty years or so, maybe even the past 0:03:24.720 --> 0:03:28.400 forty years, the era of flirting exchange rates. The chart 0:03:28.480 --> 0:03:31.120 for the dollar looks a bit like a w You know, 0:03:31.160 --> 0:03:34.600 we have a peak in the early eighties. In fact, 0:03:34.680 --> 0:03:39.320 it peaked in January, and then it picked again in 0:03:39.360 --> 0:03:42.960 the early two thousand's, and I'll give you some numbers shortly, 0:03:43.040 --> 0:03:46.000 and it's very high currently, So just to give you 0:03:46.080 --> 0:03:49.360 some some magnitude, I think it's worth having some of 0:03:49.360 --> 0:03:52.240 these numbers in our minds as we as we talk 0:03:52.280 --> 0:03:56.680 about this. The BIS publishes a long series on exchange rates. 0:03:57.120 --> 0:04:01.080 It's the b I S Series on Real Effective Exchange Rates. 0:04:01.160 --> 0:04:04.760 So it's a weighted average across all the major bilateral 0:04:05.240 --> 0:04:08.800 exchange rates with respect to a particular currency, and then 0:04:08.840 --> 0:04:12.120 we adjust for inflation relative inflation as well. If we 0:04:12.360 --> 0:04:15.920 go back fifty years and just look at the average 0:04:16.600 --> 0:04:19.159 of the real effective exchange rate for the dollar, the 0:04:19.160 --> 0:04:21.520 average is around it's just over a hundred and ten, 0:04:22.760 --> 0:04:26.800 and in eighty five it reached the hundred and forty five, 0:04:27.000 --> 0:04:29.400 just hundred and forty five. That gives you a sense 0:04:29.440 --> 0:04:32.320 of how strong the dollar was back in eighty five. 0:04:32.760 --> 0:04:36.920 In two thousand two, it peaked around hundred and twenty four, 0:04:37.279 --> 0:04:41.919 and currently it's broken through hundred and forty. So we 0:04:42.040 --> 0:04:44.480 are sort of, you know, we're not quite there in 0:04:44.600 --> 0:04:48.400 terms of level, but we're you know, reasonably close. And 0:04:48.800 --> 0:04:50.760 to give you a sense of the of the troughs, 0:04:51.200 --> 0:04:53.800 there were periods of a weeker dollar as well. The 0:04:53.880 --> 0:04:56.359 first trough, you know, the first trough in the w 0:04:56.520 --> 0:04:59.200 as it were, that comes in the early nineties. It 0:04:59.279 --> 0:05:04.160 reached the low nineties, and then just after the global 0:05:04.360 --> 0:05:08.360 financial crisis it again reached the early the low nineties. Then, 0:05:09.120 --> 0:05:12.040 so there happens some wiggles in the last five or 0:05:12.080 --> 0:05:14.200 six years. But I think it's you know, useful to 0:05:14.240 --> 0:05:17.160 have this kind of broad historical sweep as well. There's 0:05:17.200 --> 0:05:20.039 that famous phrase, and I guess it was former Treasury 0:05:20.040 --> 0:05:22.239 I just had to google it that former Treasury Secretary 0:05:22.320 --> 0:05:26.520 John Connelly stated the dollars our currency, but it's your problem, 0:05:26.520 --> 0:05:29.320 our currency. Your problem is this phrase that gets repeated 0:05:29.360 --> 0:05:31.120 a lot, and I feel like when I think about, well, 0:05:31.160 --> 0:05:33.680 how is it your problem? How is it everyone else's problem? 0:05:33.720 --> 0:05:36.080 Your work in particular, you know, I always think back 0:05:36.120 --> 0:05:39.320 to it, but just just start broadly, how would you 0:05:39.400 --> 0:05:42.760 summarize the strange that it places on the global economy 0:05:42.839 --> 0:05:46.240 when the dollar moves up this rapidly. What we can do, Joe, 0:05:46.360 --> 0:05:50.040 is to highlight some of the roles played by the dollar. 0:05:50.080 --> 0:05:53.800 I mean, it is the premiere international currency, and it 0:05:53.960 --> 0:05:57.360 is the premier currency, uh in pretty much all respects. 0:05:57.360 --> 0:06:01.640 So it is the invoicing currency of choice and international trade. 0:06:02.440 --> 0:06:06.799 It is therefore the trade financing currency as well, quite naturally, 0:06:06.839 --> 0:06:10.600 because if you're invoicing in a particular in a particular currency, 0:06:10.720 --> 0:06:15.039 then the then the trade financing will also be in 0:06:15.120 --> 0:06:17.919 that currency as well. But more broadly, it is a 0:06:17.920 --> 0:06:21.720 currency that figures very highly in reserve holdings, but in 0:06:21.760 --> 0:06:25.040 particular in capital markets and cross border banking as well. 0:06:25.120 --> 0:06:27.240 So it's the, if you like, the funding currency for 0:06:27.279 --> 0:06:30.440 global banking and capital markets. So what that means is 0:06:30.600 --> 0:06:33.320 that you know, if it's a funding currency, it's the 0:06:33.400 --> 0:06:36.080 currency that you borrow in. And therefore it's the currency 0:06:36.080 --> 0:06:38.760 of leverage to some extent. And so when the dollar 0:06:38.839 --> 0:06:41.400 becomes strong, if you like, it's the it's the leverage 0:06:41.400 --> 0:06:45.000 that becomes you more costly. So it's quite natural for 0:06:45.040 --> 0:06:47.920 you to see the pullback and risk appetite if you 0:06:48.080 --> 0:06:51.000 like a reduction in risk taking as well. So there's 0:06:51.000 --> 0:06:54.200 a very strong risk taking element, you know, as the 0:06:54.520 --> 0:06:57.440 as the dollar strengthens, where you know, there's a kind 0:06:57.440 --> 0:07:00.040 of you know, pullback from from mistake, and so a 0:07:00.560 --> 0:07:05.120 stronger dollar has an effect on trade but also on 0:07:05.320 --> 0:07:07.640 financial conditions as well, I think. So that's the kind 0:07:07.680 --> 0:07:11.720 of one sentence, you know summary. Yeah, when we spoke 0:07:11.840 --> 0:07:15.160 to um John Turik in the summer about this on 0:07:15.240 --> 0:07:18.120 the show, you know, he kind of described how the 0:07:18.240 --> 0:07:23.080 dollar works through an economic growth channel given the trade angle, 0:07:23.200 --> 0:07:25.760 and also a liquidity one because the dollar has this 0:07:25.840 --> 0:07:29.560 unusual position in the global financial system where it's a 0:07:29.600 --> 0:07:32.680 safe haven currency. It's considered that and so when you 0:07:32.720 --> 0:07:36.240 get worries about economic growth slowing because of the higher dollar, 0:07:36.360 --> 0:07:38.760 you tend to get more flows into dollar assets, and 0:07:38.800 --> 0:07:40.800 then the dollar goes up even more, so you get 0:07:40.800 --> 0:07:45.160 this kind of cycle. I guess, maybe just one more 0:07:45.200 --> 0:07:48.920 basic question, but why has the dollar been going up? 0:07:49.040 --> 0:07:51.840 Is it all about interest rate differentials and the fact 0:07:51.840 --> 0:07:55.280 that the Fed is hiking or are there other factors 0:07:55.360 --> 0:07:58.960 to it? And you know, I'm thinking specifically about again 0:07:59.320 --> 0:08:01.600 one of the dollar are is very specific or unique 0:08:01.680 --> 0:08:05.120 roles in the world of commodities pricing. I'm certainly the 0:08:05.160 --> 0:08:09.040 relative pace of managree tightening has certainly played a role, 0:08:09.120 --> 0:08:11.720 and you know that's something that we describe in the bulletin. 0:08:12.000 --> 0:08:16.480 If you look at the relative interest rate differentials between 0:08:16.720 --> 0:08:20.160 the US and other countries, we do see a relationship there. 0:08:20.160 --> 0:08:23.400 Where As the interest rate gap widens, we do see 0:08:23.600 --> 0:08:27.120 a an impact on the bilateral exchange rate, so the 0:08:27.120 --> 0:08:30.400 the other currency tends to depreciate more. So I think 0:08:30.440 --> 0:08:33.160 that's a that's a pretty familiar story, and you know 0:08:33.200 --> 0:08:35.199 that is a large part. But I think there is 0:08:35.240 --> 0:08:38.720 also a very important real economy effect here as well. 0:08:38.840 --> 0:08:41.440 If we look at the terms of trade, so roughly, 0:08:41.840 --> 0:08:43.880 you know, how much has the price of your exports 0:08:44.000 --> 0:08:46.280 changed the relative to the price of your imports. A 0:08:46.400 --> 0:08:50.000 very recent development has been that the US has become 0:08:50.160 --> 0:08:55.440 a uh net energy exporter, especially in natural gas. So 0:08:56.000 --> 0:09:00.640 compared to past episodes when a stronger dollar went hand 0:09:00.679 --> 0:09:04.040 in hand with weaker commodity prices, you know, there is 0:09:04.360 --> 0:09:06.880 then this this additional effect that comes from the terms 0:09:06.880 --> 0:09:09.160 of trade as well. So the dollar has moved to 0:09:09.240 --> 0:09:12.400 some extent in line with other commodity exporters, So that's 0:09:12.440 --> 0:09:15.280 the other that's the other factor. And yet a third 0:09:15.320 --> 0:09:18.520 factor would be what you've already mentioned, Tracy, which is 0:09:18.600 --> 0:09:21.720 that as uncertainty is increased, the dollar tends to attract 0:09:21.800 --> 0:09:24.240 your safe haven flows as well. So I think I 0:09:24.280 --> 0:09:27.520 would say all of those are, to some extent, the 0:09:27.559 --> 0:09:30.640 consequence of the unusual sequence of shocks we've had. So 0:09:30.679 --> 0:09:33.400 we had obviously the pandemic, but also the war in 0:09:33.520 --> 0:09:37.560 Ukraine and the and the subsequent impact of commodity prices 0:09:37.600 --> 0:09:42.560 as well. And you can certainly put the monetary policy 0:09:42.600 --> 0:09:45.319 responses also in this context. So I think we have to, 0:09:45.600 --> 0:09:49.120 as it were, have a pretty comprehensive you know, I 0:09:49.280 --> 0:09:51.880 joined that picture of why we are where we are. 0:10:08.400 --> 0:10:10.720 I want to talk more about the commodity angle, because 0:10:10.720 --> 0:10:14.240 that seems like what's really distinct and unusual here. And 0:10:14.280 --> 0:10:15.920 if you, you know, you look at the chart of 0:10:16.200 --> 0:10:19.280 past dollar spikes that you talked about, those were the 0:10:19.360 --> 0:10:21.520 era in which, you know, the US was a big 0:10:21.520 --> 0:10:25.199 oil importer and was not a commodity exporter at all. 0:10:25.480 --> 0:10:27.920 This is a new We're not. We're a huge oil producer, 0:10:28.040 --> 0:10:31.120 as we know, and the whole world is thirsty for 0:10:31.160 --> 0:10:35.240 our natural gas. We're exporting as much as is physically possible. 0:10:35.679 --> 0:10:38.319 How does that change things? And I'm also curious does 0:10:38.320 --> 0:10:40.719 that create a spiral? So I'm thinking about sort of like, 0:10:40.760 --> 0:10:43.079 you know, the Japanese yen, and for a long time 0:10:43.160 --> 0:10:47.400 Japan was a big export powerhouse. Now it actually I 0:10:47.440 --> 0:10:50.959 believe is an importing country, particularly due to energy prices. 0:10:51.240 --> 0:10:55.120 We've seen how much the yen has weakened. Generally, does 0:10:55.200 --> 0:10:57.760 this create like sort of a snowball effect where the 0:10:57.840 --> 0:11:01.440 terms of trade for a country like Japan deterior It's 0:11:01.520 --> 0:11:04.560 the end weekend and then energy prices get even more 0:11:04.600 --> 0:11:07.880 expensive and sort of accelerating the cycle. That is certainly 0:11:07.920 --> 0:11:10.960 one factor, Joe, and the terms of trade effect also 0:11:11.040 --> 0:11:13.680 show up in the in the trade figures as well, 0:11:13.880 --> 0:11:17.800 both for Japan and other other commodity importing areas, and 0:11:17.800 --> 0:11:19.880 I'm thinking of Europe in particular. You know, we do 0:11:20.040 --> 0:11:24.320 see the impact of the energy and food you know, 0:11:24.360 --> 0:11:27.280 price changes, price increases recently. But I think the important 0:11:27.320 --> 0:11:31.640 point here is the invoicing currency role of the dollar. 0:11:32.000 --> 0:11:36.199 The dollar is the invoicing currency for energy, food, as 0:11:36.200 --> 0:11:38.920 well as for manufacturing, by the way, but especially for 0:11:39.000 --> 0:11:41.880 energy and food, because what that means is, if you're 0:11:42.240 --> 0:11:44.760 in Japan or in the r area, you've seen your 0:11:44.800 --> 0:11:48.720 currency depreciate against the dollar, and we know that commodity 0:11:48.760 --> 0:11:52.880 prices have increased even in dollar terms, and so in 0:11:53.040 --> 0:11:55.760 euro or end terms, it's actually increased a lot more. 0:11:55.960 --> 0:11:57.760 And you know, there's a chart in the in the 0:11:57.840 --> 0:12:01.280 bulletin that shows, you know, just roughly than magnitude, and 0:12:01.360 --> 0:12:05.439 what that means is the energy and food prices are 0:12:05.600 --> 0:12:09.160 then incorporated into your inflation figures. And I think the 0:12:09.200 --> 0:12:12.520 important point to mention here, and you've covered this in 0:12:12.600 --> 0:12:17.240 your previous podcasts, energy and food prices. They're really salient 0:12:17.480 --> 0:12:20.240 commodities as far as household behavior is concerned, how shol 0:12:20.280 --> 0:12:24.679 perceptions are concerned, and so they do figure quite importantly 0:12:24.840 --> 0:12:28.199 in how expectations are set. And therefore, you know, how 0:12:28.240 --> 0:12:31.760 you know, behavior changes as well, and so perhaps even 0:12:31.800 --> 0:12:35.760 more than other traded goods, if you see this very 0:12:35.760 --> 0:12:40.319 sharp increase in commodity prices, especially in your own currency, 0:12:41.200 --> 0:12:43.960 I feel like that would have a disproportionate effect on inflation, 0:12:44.360 --> 0:12:48.560 you know, domestically and the way that inflation is perceived. 0:12:49.000 --> 0:12:53.920 What's different this time is that typically you know, historically 0:12:53.920 --> 0:12:58.360 we see commodity prices weakening as the dollar strengthens. I mean, 0:12:58.400 --> 0:13:01.319 there's a very you know well as published relationship, historical 0:13:01.400 --> 0:13:05.280 relationship where a strong dollar goes hand in hand with 0:13:05.320 --> 0:13:09.040 weaker commodity prices. What's different this time is that, you know, 0:13:09.120 --> 0:13:12.120 given the shocks, given the nature of the shocks, we 0:13:12.200 --> 0:13:17.520 have this conjunction of a stronger dollar and higher commodity 0:13:17.559 --> 0:13:20.800 prices due to the war in Ukraine, for example, and 0:13:21.360 --> 0:13:25.120 that combination, which is a very unusual one, has had 0:13:25.160 --> 0:13:28.400 an effect in raising the food and energy prices in 0:13:28.480 --> 0:13:31.839 other currencies a lot more than it did in the past. Right, 0:13:31.880 --> 0:13:35.840 So normally you would have this inverse correlation between the 0:13:35.920 --> 0:13:40.040 dollar and commodities, especially oil, and if the dollar went up, 0:13:40.120 --> 0:13:42.520 you would expect oil prices to go down. But that's 0:13:42.600 --> 0:13:45.439 not happening this time around. Can you talk a little 0:13:45.440 --> 0:13:49.920 bit more about what that means for countries that are importing, 0:13:50.160 --> 0:13:53.000 you know, a lot of food and energy, because I 0:13:53.040 --> 0:13:56.760 think it's pretty important. Yes, it is very important, and 0:13:56.840 --> 0:13:59.400 clearly it is a negative shock to your terms of trade. 0:14:00.240 --> 0:14:04.160 It raises the price of food, it raises the price 0:14:04.280 --> 0:14:07.000 of energy in your domestic currency. And so that will 0:14:07.040 --> 0:14:09.600 feed into inflation. So it's a bit of a bit 0:14:09.600 --> 0:14:13.200 of an unpleasant set of shocks there. We see, for example, 0:14:13.440 --> 0:14:16.880 that the economies that are very geared towards manufacturing have 0:14:17.080 --> 0:14:20.360 seen a worsening of their trade balance, you know, as 0:14:20.480 --> 0:14:23.200 the terms of trade have moved against them. And it's 0:14:23.240 --> 0:14:26.400 also true that as the exchange rates in these countries 0:14:26.400 --> 0:14:30.680 have also depreciated relative to the dollar, that's also been 0:14:30.800 --> 0:14:33.960 an unwelcome factor in raising inflation as well. Because of 0:14:34.000 --> 0:14:37.440 the very unusual sequence, very unusual combination of shocks, it 0:14:37.520 --> 0:14:40.400 has been a double valny. Can you talk a little 0:14:40.440 --> 0:14:43.920 bit more about what it means from a policy perspective? 0:14:44.080 --> 0:14:47.240 Four countries that are faced with this unusual series of shocks, 0:14:47.280 --> 0:14:49.960 So there is high inflation, but much of it in 0:14:50.080 --> 0:14:54.120 areas that they probably can't control, you know, the global commodities. 0:14:54.560 --> 0:14:57.560 What does it mean in terms of policy space? That 0:14:57.760 --> 0:15:00.560 are different countries, haven't you know? We all vols seeing 0:15:00.600 --> 0:15:03.480 the end charge and it looks like maybe there has 0:15:03.520 --> 0:15:06.400 been some intervention at some point, but you know, it's 0:15:06.440 --> 0:15:09.080 limited and it's sort of ambiguous. But what is it 0:15:09.160 --> 0:15:12.000 due to policy makers in countries that are faced with 0:15:12.080 --> 0:15:14.600 this series of shocks. Yeah, I think that's a very 0:15:15.560 --> 0:15:18.320 good question, Joe, and I suppose the first order of 0:15:18.360 --> 0:15:21.640 business is to is to address the inflation that is underlying. 0:15:22.200 --> 0:15:25.040 If you like the it actually sets the terms of 0:15:25.080 --> 0:15:28.360 the trade off for all these other policy questions. Even 0:15:28.400 --> 0:15:33.760 if the source of the inflation is these higher energy 0:15:33.800 --> 0:15:36.880 and food prices, we know from historical experience, at once 0:15:36.920 --> 0:15:41.840 that gets entrenched, it will feed into expectations about, you know, 0:15:41.840 --> 0:15:44.640 how inflation will develop in the future. It's going to 0:15:44.680 --> 0:15:48.640 get much more difficult to to bring inflation down. And 0:15:48.640 --> 0:15:50.960 and just to give you a sense of how that 0:15:51.000 --> 0:15:56.560 process has has progressed, we know and you've been covering 0:15:56.600 --> 0:15:59.320 this in your podcast a lot. In the early days 0:15:59.360 --> 0:16:01.640 of the shock, uh, you know, just off you know, 0:16:01.720 --> 0:16:05.760 just as we were talking about supply chains, it seemed 0:16:05.800 --> 0:16:09.600 that the price increases were limited to you know, certain 0:16:09.720 --> 0:16:11.800 good sectors. Some of the work of the b I 0:16:11.920 --> 0:16:14.720 S we we also follow that pretty closely. But what 0:16:14.720 --> 0:16:17.440 we've seen is that there's been a broadening out of 0:16:17.520 --> 0:16:22.320 inflation over the subsequent months. We've seen the core inflation 0:16:22.360 --> 0:16:25.720 measure also move up. And this is global energy as well, 0:16:26.600 --> 0:16:28.400 and this is global so this is a phenomenon that 0:16:28.440 --> 0:16:30.400 we're seeing in every country, which is not just high 0:16:30.480 --> 0:16:34.640 inflation now just headline inflation, but this broadening effect of 0:16:34.760 --> 0:16:39.160 across goods and services. Yeah, exactly, and we see it 0:16:39.160 --> 0:16:42.880 in core inflation. And this is true outside the US 0:16:42.920 --> 0:16:45.440 as well. So irrespective of the source of the shock, 0:16:45.600 --> 0:16:48.760 you know, once inflation it gets entrenched, we know there's 0:16:48.760 --> 0:16:51.000 going to be very difficult to bring it down. So 0:16:51.040 --> 0:16:54.080 addressing inflation would be certainly, you know, the first order 0:16:54.080 --> 0:16:56.840 of business. But as you're doing that, I think there 0:16:56.880 --> 0:16:59.480 are other things one can do to mitigate some of 0:16:59.480 --> 0:17:02.640 the effects of a stronger dollar, especially if it affects 0:17:02.680 --> 0:17:06.520 your financial markets. So we know, as we you know, 0:17:06.560 --> 0:17:08.800 spoke just earlier, one of the very you know, well 0:17:08.920 --> 0:17:11.480 established effects of a stronger dollar is that it tightens 0:17:11.520 --> 0:17:14.720 financial conditions. You know, it is the global funding currency, 0:17:14.960 --> 0:17:16.879 it's the currency that you borrow, and therefore it's the 0:17:16.920 --> 0:17:20.040 currency of leverage. So stronger dollar tends to go hand 0:17:20.080 --> 0:17:24.200 in hand with the leveraging if you like, a recoiling 0:17:24.560 --> 0:17:28.520 from risk taking, and that manifests itself in you know, 0:17:28.560 --> 0:17:32.520 not only hanking sector flows bank lending, but also in 0:17:32.600 --> 0:17:36.720 capital markets. You see for example, spreads on corporate bonds 0:17:36.880 --> 0:17:40.000 go up as a dollar strengthens, And there's a chart 0:17:40.040 --> 0:17:43.639 in the bulletin, but I think illustrates that quite quite strikingly. 0:17:44.000 --> 0:17:46.879 And we also have very good evidence that it affects 0:17:46.920 --> 0:17:50.439 the shadow price of intermediary balance sheet if you like. 0:17:51.040 --> 0:17:53.760 So you know when you when you speak to Salt 0:17:53.800 --> 0:17:58.080 and Posts or or Perry Merlin, you know they I 0:17:58.119 --> 0:18:00.159 think have a very similar sort of approach to the US. 0:18:00.600 --> 0:18:02.640 There is a there is a sort of marginal cost 0:18:02.680 --> 0:18:05.680 of balance sheet we tend to observe, for example, through 0:18:05.720 --> 0:18:10.879 the deviation from covered interest parity. The ffect spaces spread, 0:18:11.359 --> 0:18:15.200 for example, is that that spread goes up when the 0:18:15.280 --> 0:18:17.359 daughter is stronger, which is a kind of tell tale 0:18:17.440 --> 0:18:21.600 sign that pattern shoot is becoming more expensive. And so 0:18:22.080 --> 0:18:25.040 for all these reasons, if the tightening of financial conditions 0:18:25.160 --> 0:18:28.480 gets excessive, and you know, it might sort of trigger 0:18:29.040 --> 0:18:32.600 episodes of stress, and then of course there are ways 0:18:32.720 --> 0:18:35.280 of mitigating that kind of stress. I think central banks 0:18:35.280 --> 0:18:37.840 have and how the tools to do that. You can 0:18:37.920 --> 0:18:41.679 mitigate that partly by in a supplying liquidity in a 0:18:41.760 --> 0:18:45.600 very sort of strategic way, but also effects intervention to 0:18:46.240 --> 0:18:49.240 as we'll lean against the wind is another way to 0:18:49.359 --> 0:18:51.359 address partly this kind of you know, you know, the 0:18:51.400 --> 0:18:54.560 tightening of financial conditions as well. This is what I 0:18:54.560 --> 0:18:57.359 wanted to ask you about. Like we used to worry 0:18:57.400 --> 0:19:01.439 about competitive devaluation in years since two thousand eight, But 0:19:01.480 --> 0:19:06.080 should we be worried about competitive I guess it interventions 0:19:06.200 --> 0:19:09.520 now people trying to strengthen their currency against the dollar. 0:19:09.640 --> 0:19:13.600 And how sustainable are those types of moves? You know, 0:19:13.640 --> 0:19:16.680 I can see some parts of the argument, but why 0:19:17.280 --> 0:19:20.120 a strongervelop might lead to you know, high interest rates 0:19:20.119 --> 0:19:22.760 and other jurisdictions you know, higher than pactic could be 0:19:22.880 --> 0:19:25.159 you know, in the absence of a stronger dollar. But 0:19:25.200 --> 0:19:27.800 I'm not sure that that the argument sort of fully 0:19:27.800 --> 0:19:30.640 comes around to a conclusion that you know, this leads 0:19:30.680 --> 0:19:34.800 to kind of competitive strengthening. So one part that certainly 0:19:34.840 --> 0:19:37.440 does you know, make some sense is the idea that 0:19:37.760 --> 0:19:41.840 you know, as the dollar strengthens, it raises the local 0:19:41.880 --> 0:19:45.159 currency price of food and energy, and that certainly has 0:19:45.200 --> 0:19:49.000 an effect on domestic inflation for the reasons that we discussed, 0:19:50.040 --> 0:19:53.199 so that has to be met by a monetary policy 0:19:53.240 --> 0:19:56.720 response domestically, So there would be a tightening there, but 0:19:57.040 --> 0:19:59.760 for a kind of feedback loop to be established. You 0:20:00.000 --> 0:20:03.440 you need some some kind of way of completing that circle. 0:20:03.600 --> 0:20:06.159 And I think that additional step for us it is 0:20:06.200 --> 0:20:10.080 not as clear. If anything, you would imagine that, you know, 0:20:10.119 --> 0:20:12.240 the quartation goes the other way. So as the global 0:20:12.280 --> 0:20:15.360 economy weakens, you might you know, see the fair sort 0:20:15.359 --> 0:20:17.560 of moderating, you know, if if there is a demand 0:20:17.600 --> 0:20:19.919 spill over. But clearly this is something that you know, 0:20:19.960 --> 0:20:23.080 we need to keep an eye on. It's certainly a 0:20:23.080 --> 0:20:27.240 departure from the usual story about competitive devaluations, you know, 0:20:27.359 --> 0:20:30.919 currency wars in the traditional sense. But I think the 0:20:30.840 --> 0:20:33.360 the you know, the effects are pretty multifaceted here. And 0:20:34.640 --> 0:20:37.800 if we just look at some of the more recent 0:20:38.320 --> 0:20:41.760 events and in capital markets that you mentioned that the 0:20:41.800 --> 0:20:43.760 dollar has sort of slightly topped out now in the 0:20:43.840 --> 0:20:46.280 last few days, but more generally, if we look at 0:20:46.320 --> 0:20:49.600 the monetary policy responses around the world, I would say that, 0:20:49.680 --> 0:20:52.760 you know, there are sort of signs that this kind 0:20:52.760 --> 0:20:57.679 of reverse currency wars scenario probably isn't you know, as 0:20:57.680 --> 0:21:01.280 strong as you know, we might have fooled and so yeah, 0:21:01.280 --> 0:21:03.879 so I would accept some parts of that, but probably 0:21:03.920 --> 0:21:07.920 wouldn't embrace it. Holy So you mentioned you know, you 0:21:08.280 --> 0:21:11.520 referenced our conversation recently with Resulting and Period that was 0:21:11.520 --> 0:21:13.960 about the future of the dollar. But I actually want 0:21:13.960 --> 0:21:17.159 to sort of look backwards for a second, because you know, 0:21:17.359 --> 0:21:19.879 as you talk about, as we've been discussing, the dollar 0:21:20.119 --> 0:21:23.680 is the invoice and currency, It's the funding curacy currency, 0:21:23.720 --> 0:21:27.399 it's the everything currency, it's the borrowing currency. When you 0:21:27.560 --> 0:21:31.000 look back, either it's sort of real activity or um 0:21:31.359 --> 0:21:34.960 borrowing and hard currency for other countries. Over the last 0:21:35.000 --> 0:21:37.560 few years, has there been any change to the trajectory 0:21:37.600 --> 0:21:40.160 of the importance of the dollar or has it been 0:21:40.200 --> 0:21:43.440 sort of just going from strength to strength in terms 0:21:43.480 --> 0:21:46.199 of its role in the world economic Well, Joe, I 0:21:46.200 --> 0:21:48.119 think I can sort of give you some hard numbers 0:21:48.119 --> 0:21:50.399 here because as well as the bulletin, we we have 0:21:50.600 --> 0:21:54.360 just come out with the BIS triannual survey. Every three 0:21:54.440 --> 0:21:57.480 years we do a pretty you know, thorough stoptake of 0:21:57.640 --> 0:22:00.840 what's going on in the effects market particular, but also 0:22:00.880 --> 0:22:03.360 in the interest ructor of this market. But let's focus 0:22:03.359 --> 0:22:06.000 on the effects market. So we do a pretty you know, 0:22:06.160 --> 0:22:09.640 detailed stock take. We gather data from all our part 0:22:09.640 --> 0:22:12.480 per central banks, but we have a pretty good take 0:22:12.560 --> 0:22:16.800 and We've just come out with the latest Triangle survey 0:22:16.880 --> 0:22:19.400 and the answer is not much has changed. If anything, 0:22:19.560 --> 0:22:23.000 the role of the dollar has has strengthened somewhat. So 0:22:23.440 --> 0:22:26.520