|The above chart highlights the size of this issue|
The way things are structured the dollar is the linchpin of global fiance and has guaranteed itself a place at the table until dethroned. This means that countries like Japan and China which hold a lot of American bonds and thus dollars will be able to offset some of the pain of a weakening national currency unfortunately, most countries are not in such a position. Making matters worse countries that are mired in debt often have tied or pegged that debt to the dollar this translates into a lot of economic pain if the dollar grows stronger and many will find themselves under a great deal of pressure just to survive. This is a major reason markets love stability and stable currencies, it provides an environment that yields the most benefits by reducing overall risk. The strengthening dollar may be sending a signal that the global economy is unstable. The fact is many currencies are under assault because both economies are weak and countries are buried in debt they can never repay at real market interest rates.
A change in currency values may be dramatic and using history as a guide markets often show no mercy when this shift occurs. Here in America when the dollar is weak consumers pay more for imports but are able to sell and export more goods and services as they become more competitive. When the dollar gains strength the cost of foreign imports drop and the American consumer is the winner, but it comes at the cost of jobs and lost competitiveness. This is supposed to be a self correcting system with values determined within the free market system. Unfortunately, in a system gone wild where central banks have created massive amounts of fresh money and corrupted the mechanism through currency swaps and backdoor deals that support one currency over another it is rapidly breaking down. Much of what we see happening today in world trade and currencies is similar to what brought on the great depression. Currency devaluation is a form of "protectionism" and shouts let my neighbors be damned, but devaluing a currency often fails to address the root cause of economic problems.
Just printing more money is not sustainable and little comfort should be garnered from assets or pensions being pegged to future inflation because promises can be broken and rules rewritten. When it comes to the future of the dollar one thing is perfectly clear, it is not carved in stone. It will be the result of manipulation and reaction to reactions by all the players with input into this massive market. Recently the major world currencies have been trading in a narrow range as if held in limbo by some great force. This has allowed people to think we were on sound footing as central banks across the world continued to print and pump out money chasing the "ever elusive growth" that always appears to be just around the corner. Still remember the major currencies have made multi-year highs or lows depending on the match-up and this is a big red flashing signal of instability. The strengthening dollar may be sending the warning the whole system is about to become undone because many countries are buried in debt they can never repay at real market interest rates.
A Bloomberg article by October of 2014 looked into how Federal Reserve minutes showed officials were concerned about our stronger currency and the risk it posed to the U.S. economic outlook. Afterwards, the greenback weakened as futures traders lowered bets the Fed will lift interest rates. This brought a consolidation and a brief period of stability, but overall, the bull rally on the dollar is still intact. I contend that a rise in the dollars value will overwhelm efforts by central banks to reinforce feelings of economic stability by keeping currencies trading in the "quiet" range that has allowed them to continue printing and pumping out money. Because of weak demand for goods little reason has existed for investors to guide this money into investments in buildings and equipment, instead much of it has flowed into intangible investments. This is the reason inflation has not been a major problem and explains the surge of stock prices to all time highs.
When investors become unwilling to buy the bonds of heavily indebted nations the bond bubble will burst and the values of currencies in those countries will tumble bringing the stock markets down at the same time. The yen and the euro are in serious trouble, and the pound is very vulnerable to contagion. The path Janet Yellen has continued down is reckless, what the ECB and BOJ have done is criminal. With this in mind remember the collapse of any currency causes wealth to flee both from the country and that currency and seek any safe haven in reach. The bottom-line is that while many people go about their daily lives giving little thought to currency valuations they leave themselves open to the whims of those that control, manipulate and play in this important area of the global economy. John Maynard Keynes said "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known.
Currencies are a tool by which wealth can be transferred, it is a Trojan horse that often goes unnoticed until it is to late. A ten percent move higher or lower against a foreign currency can have a great deal of impact on how your net worth stacks up against someone across the world. This rapidly becomes apparent to anyone doing a great deal of travel and highlights why all of us should be very concerned where we stand when the smoke clears from the currency wars before us. Do not underestimate the forces in play. The central banks have promoted the the myth that advanced Democratic countries are immune to hyperinflation, but this myth will be destroyed as the value of the yen or euro spirals downward, soon after that people will realize that no currency is safe when it falls from grace. The country most vulnerable to a currency collapse is Japan which faces a wall of debt that can only be addressed by printing more money and debasing the yen. Because of its size people forget that Japan is the worlds third largest economy and as a huge economic power when Japan crumbles it will be felt across the world.
The U.S. Dollar has broken out against every major currency at a pace not seen since the 2008 crisis and remains within reach of its highs. Its jump that began in mid-2014 was the biggest since the financial system was in a free-fall. The world is currently engaged in a massive game of speculation and chance that contains a lot of risk. This is a bubble manipulated higher by those with money chasing returns and taking on risk in a low interest rate environment. This massive misallocation of capital will come back to haunt investors and the dollar and currencies are now moving front and center. It appears the dollar has been in a consolidation period and when the next leg up begins risk will dramatically increase. This could signal the onset of the next global crisis to which 2008 was just the warm-up. Political considerations and insider deals between both nations and Central Banks play a big roll in this game and even after many countries have reduced their holdings in dollar reserves the dollar still carries a major wallop that will effect everyone going forward.
Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest. In an article published in Sept. 2014 titled "Caution Alert, Currencies May Get Wild" I wrote about how markets show no mercy when a major currency shift occurs and how the falling value of both the yen and euro have the potential to reek havoc through contagion. Today we live in an age when billions of dollars can be traded in just the blink of an eye, imagine how fast things could go to hell in an environment like this. The link is below;