There used to be a no-brainer strategy among traders to take a wager that stock prices would go up whenever the United States dollar turned wobbly. Those were the days.
Now, it seems the reverse holds true as well: As the greenback goes on a tear and rallies against other major currencies such as the euro and the Japanese yen, it is Wall Street's turn to wobble.
Not that this is necessarily a bad thing. Both the Dow Jones Industrial Average and its broader-based sister index, the S&P 500, have hit record high levels umpteen times since last year, so taking some money off the table would seem like a reasonable course of action for any prudent investor, US dollar rally or not.
European exporters are also jubilant as the greenback's strength has come amid a weakening of the euro as the European Central Bank launches its own quantitative easing (QE) efforts, making monthly purchases of up to €60 billion (S$87.7 billion) of the debts of governments and institutions.
In particular, the cheap euro is a godsend to European carmakers such as Italy's Fiat Chrysler, France's Peugeot Citroen and Renault, and Germany's big three - Volkswagen, Daimler and BMW.
This has, in turn, given a big boost to euro zone stock markets. Since January, Frankfurt's Dax Index has gained 20.6 per cent and the CAC in France is up 16.9 per cent, even though there has been periodic handwringing over troubles facing the European economy.
It reminds some traders of the upward trajectory enjoyed by Tokyo's Nikkei-225 Index when the Bank of Japan launched its own QE blitz over two years ago.
But there is a sinister side to the greenback's relentless rise that has some market pundits worried.
In recent months, international tensions over Russia, concerns about China's sharper-than-expected slowdown and fast-falling commodity prices have prompted foreign capital to head for the exit on emerging market currencies.
This has led the Bank of International Settlements (BIS) to warn that the flight to safety into the US dollar may prove once again to be the harbinger for turmoil in the developing world - as it did almost two decades ago during the Asian financial crisis. That meltdown prompted emerging economies to wean themselves off the habit of pegging their currencies to the greenback and borrowing overseas.
But non-financial firms have stepped into the breach, issuing US-dollar denominated bonds by the billions that have been snapped up by yield-hungry Western fund managers lured by the US Fed's zero interest rates.
By some estimates, foreigners have now borrowed about US$9 trillion (S$12.5 trillion). That is up from US$2 trillion in 2000. Emerging markets - a big chunk of whom are Asian corporate borrowers - account for about half of these debts.
The fear is that as the US dollar gains in strength, the interest burden on these companies will escalate as they get their income stream in local currencies.
One particular source of worry is mainland Chinese firms, whose debts have jumped five-fold to US$1.1 trillion since 2008, according to the BIS data. One question being asked is whether these firms will face difficulties servicing their loans, if China were to allow the yuan to devalue against the greenback for whatever reason.
The redeeming feature is that the resurgent dollar may stay the US Fed's hands in raising interest rates as it would hit the foreign earnings of US multinational firms such as Apple and Procter & Gamble, drive up the costs of exports and worsen the US trade balance.
It will intensify the debate among the rate setters as to whether June is the right time to push the button to raise US interest rates, which have stayed at near-zero levels for six years. This means traders will be watching the US Fed's upcoming rates-setting meeting to see whether or not the word "patient" remains in its statement about going ahead with any possible rate hike.
This may set markets on edge. Expect more wild price swings in the meantime.
This article was first published on March 16, 2015.
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