What Will Knock the Dollar off its Perch?

“Would be foolish to rule out a similar if not a more devastating outcome.”

The US dollar has soared against other currencies, or these currencies have fallen or crashed against the dollar, whichever way we look at it. And economists are trying to explain that phenomenon.

With commodities-linked currencies, like the Canadian dollar, the Aussie dollar, and the Norwegian krone, the commodities rout was blamed. In addition, the Bank of Canada is fighting its own currency war against the US, Canada’s primary trading partner. It’s trying to demolish the loonie by jawboning it down, rather than resorting to QE like other central banks are doing. [Bank of Canada Crushes Loonie, Created Mother of All Shorts].

So as I’m writing this, the loonie dropped to $0.7138, the lowest since 2004.

Among developed market currencies, the Canadian dollar and the Norwegian krone had fallen the most, both down about 16% for the year. But the euro is not a commodities-linked currency, nor is the UK pound, or the Swedish krona, and they too swooned against the dollar. The euro lost over 10% last year, which brought its two-year loss to about 27%, the worst two-year swoon in the euro’s illustrious history, a satisfactory result of the ECB’s publicly declared currency war against the rest of the world.

The Fed has waffled and flip-flopped about raising interest rates all last year before finally announcing a barely perceptible quarter-point hike in December, while other central banks went the opposite route, with more QE and even negative deposit rates. That divergence in monetary policies caught some of the blame.

But wait…  the Japanese yen, crushed as it had been in prior years, actually remained nearly stable against the dollar in 2015, despite the Bank of Japan’s mega-QE and forever-zero-interest-rate policy. So blaming diverging monetary policies goes only so far before it too falls apart.

But here’s the thing: the big money-making trade, one of the few things that worked in 2015, is long the dollar short everything else. And everyone has jumped on the same side of the boat.

The folks at Economics and Strategy, National Bank Financial, a division of National Bank of Canada, pointed out just how lopsided that trade has become:

“Non-commercial” net long positions on the USD averaged well over 55,000 contracts last year, a record high. The euro and commodity currencies such as the Canadian dollar and Australian dollar were the main victims of such a bet with record net shorts.

The left chart below shows the huge spike in long positions on the US dollar. The right chart shows the record net short positions on the euro, the Aussie dollar, and the Canadian dollar. Particularly the euro was the favorite short target:


How much more can pile up all on the same side of the boat before it tips possibly with terrific global consequences? The economists at Economics and Strategy:

We believe the USD is now close to peaking. The trade-weighted greenback looks stretched after gaining about 20% over the last two years. The last time the USD saw a similar surge, it didn’t end up well for the global economy.

That “last time” was 1997. After years when governments and corporations in developing economies had borrowed in dollars, the surge of the dollar triggered massive currency outflows from those countries and all kinds of financial crises, including the big one at the time, the Asian Financial Crisis.

“It would be foolish to rule out a similar if not a more devastating outcome,” the economists at Economics and Strategy wrote.

Now, after seven years of the Fed’s ingenious interventions, the issue is more massive than ever. The dollar-denominated debt – loans and bonds – owed by non-bank borrowers outside the US has soared to $9.8 trillion at the end of the second quarter, according to the Bank for International Settlements. It has quadrupled since the Asian Financial Crisis and nearly doubled since the 2008 Global Financial Crisis. In relative terms, it has soared to nearly 18% of global GDP excluding the US, up from 8% just before the Financial Crisis.

These entities have all made the same bet: that the dollar would not rise, and that US interest rates would remain low. The Fed encouraged them to make that bet. But now, with the dollar soaring and US interest rates rising, even if only a tiny bit, that bet has flipped. Now for entities that do business in beaten down currencies, it’s getting increasingly difficult to service their dollar debts while dollar-denominated capital – the hot money – is receding from those places.

This leaves the world in a precarious situation: currency bets have lined up with overwhelming weight long the dollar and short everything else, while non-US corporate and government entities owe nearly $10 trillion in dollar debt, a huge bet on the other side. There isn’t going to be a smooth and easy unwind. And chances are that the dollar will get knocked off its perch in the process.

So… “It’s hard to be bullish about the global economy these days,” the National Bank Financial, reported. Read…  World Trips Over the Explosive Dollar

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  38 comments for “What Will Knock the Dollar off its Perch?

  1. mrskeptical says:

    Seems dead wrong to me. The whole world is short borrowed dollars. The dollar longs will reap the benefit when the demand for dollars surges in a bid to repay debt as the world economy stagnates.

    • Wolf Richter says:

      This kind of debt doesn’t get “repaid.” It either gets rolled over (refinanced), or shifted to another form of debt (i.e., from bank loans to bonds), or is defaulted on (where creditors are eventually getting cents on the dollar, also obtained by newly borrowed money or bailout money). No government ever repaid its debts. And corporations these days are in the same game.

      • Marty from North Dakota says:

        However, loans denominated in dollars constitute a massive short. Making the payments on $9 Trillion is a mad scramble for dollars until it stops. Is there a way to know the default rate on the offshore loans?

  2. Kevin says:

    Do lenders making dollar loans to foreign entities require the borrower to purchase a currency hedge or currency swap to mitigate the lenders currency risk? If that is true then that would push the $ value up against other currencies. Which has happened. As the loans get paid down there will be less demand for $’s and the currency will drop. Why will there not be a orderly unwind of this debt?

    • Wolf Richter says:

      no currency hedges required. Companies and governments can just issue dollar bonds as long as they can find buyers. Mexico was able to sell 100-year dollar bonds in early 2015 with a yield, if I remember right, of just over 4% that institutional investors eagerly bought before being institutionalized.

      • Jeremy says:

        Wolf: I think you will agree that two concepts that together once formed (note the past tense) the basis for the conduct of commercial activity – the sanctity of contracts and moral hazard – have become casualties of the “Great Recession” and of the desperate response by the world’s central banks . In the absence of these moral guideposts (and it is hard to conceive of circumstances under which they might be restored), one might question the significance of the world’s present debt burden. Is it truly a burden or just a computer entry that can be deleted by a keystroke?

        Do you remember the phrase Sound as the Dollar? That’s history The USD has been programmed to lose 95%+ of its value during the past 60 years – – all the while proclaiming “In God we trust.” And now the Fed unabashedly argues that 2% inflation is the answer to all our problems. “TRUST!” What an insult to our collective intelligence! But here comes the Piper – perhaps?

        • Wolf Richter says:

          Jeremy, to use your words: I think I will agree!

        • Michael Gorback says:

          I remember the phrase “Not worth a Continental” as well. ;)

        • d'Cynic says:

          Sometime in the nineties, I read that the banks would go extra length to avoid having to borrow from the central bank, i.e. use the discount rate facility, because that would advertise the fact that they have funding problems. Now, after the Great recession, there is no shame attached to it. Yet another brick off the wall.

      • mark says:

        …before being institutionalized (oh, so good)

        • Marty says:

          Japan’s debt is at 250% of GDP. Projections run to 400% by 2040. No one cares…..yet.

        • d says:

          The majority of jJapans debt is held by Japanese who are more than happy to hold it. It is denominated in yen.

          Whereas the majority greek and Mexican state debt, is held by other than Greeks and Mexicans. Further the Mexican debt in question, is denominated in US $. The only way this ever gets paid is in perpetual rollovers with more bond’s in lieu of the interest due.

          Literally worthless pieces of paper, from day 1.

        • Wolf Richter says:

          Correct, re: “The majority of Japan’s debt is held by Japanese who are more than happy to hold it. It is denominated in yen.”

          Two things to clarify:

          – about 95% was held in Japan back in the day. By now that’s closer to 100%.

          – “Japanese” includes the Bank of Japan which now holds ¥325 Trillion in JGBs, which is about a quarter of Japan’s total gross national debt. At this rate of purchases, it will own about half in a few years.

        • Marty says:

          Mexican debt in U.S. dollars is bullish for the dollar because dollars must be earned or raised to pay interest. That lasts until outright default. There is more than $7 Trillion in U.S. dollar loans out side the U.S. system.

        • d says:

          “Mexican debt in U.S. dollars is bullish for the dollar because dollars must be earned or raised to pay interest.”

          “Whereas the majority greek and Mexican state debt, is held by other than Greeks and Mexicans. Further the Mexican debt in question, is denominated in US $. The only way this ever gets paid is in perpetual rollovers with more bond’s in lieu of the interest due.

          Literally worthless pieces of paper, from day 1.”

          The holders of this debt are going to get the same treatment as the non state holders of greek debt got, from the same people.

          I have money that says these buyers, “pass” these Parcels, probably in an IPO or M & A deal, long before the music stops. If they haven’t already done so.

          All these US $ notes, are bull/bear neutral, until the music stops. Then there will be a general had currency liquidity spike, as most of those notes, held by non state entity’s will have been Securitized.

          The rule is always, follow the money.

          A lot of “fees” will be generated, in the process of, distributing, and redistributing these “Continental Notes” My money say the “Usual Suspects” will be at the end of that trail.


          The Mexican note in question is not necessarily a “Continental Note” Particularly if the price of oil in hand, returns to US $ 40-00. Much of the non US corporate issuance of US $ notes, Outside Europe, could be bought for a single “Continental Note”.

  3. Nicko says:

    I currently live in a developing country suffering a dollar crisis…they can’t get enough of them! Local currency is ever so glacially depreciating, month after month. Local economists predict another 10% devaluation thru 2016. All this means, my costs have gone down greatly, all thanks to working in dollars. USD is the safe haven, the least dirty shirt in the laundry pile.

  4. OutLookingIn says:

    The end of oil and gas being denominated in USD (the petrodollar) will spell the end of the USD’s run as the reserve currency. The world will turn to using a multiplicity of different currencies.

    This paradigm shift has begun, as some of the main actors in OPEC are now accepting different payment methods, including physical gold bullion.

    It is perplexing that at this time, we have conflict between Saudi Arabia and Iran, while the Saudi regime publicly dismisses any US concerns?

  5. Ptb says:

    USD has a strong following wind. EM debt in USD, increasing Middle East conflict, China slow down, euro structure looking terrible, increasing Fed rate, etc… This trend will probably subside when the us economy takes such a strong nose dive from the strong dollar that the govt and the fed pull a huge knee jerk reaction that scares the world.

  6. Oneyedjack says:

    23 countries, and 60% of the world’s GDP, are right now setting up new swap lines which bypass the dollar, SWIFT, and the BIS, and will usher in a new global currency system which will kill the dollar.Saudi petro dollar as well

    • SaveUs says:

      Oneyedjack you are right on the money. No pun intended. If I may add to your comment. The Shanghi Cooperation Organization (SCO), Asian Infrastructure Investment Bank (AIIB) and China International Payment System are all in place. The IMF has approved the China Yuan/Renminbi in its Special Drawing Rights.

      The following is some suggested reading: “United Nations: General Assembly 17, September 2014. Resolution adopted by the General Assembly on 9, September 2014. 68/304 Towards the establishment of a multilateral legal framework for sovereign debt restructuring process”

      We just need to connect the dots to see what is happening in our financial world.

      • CrazyCooter says:

        You have to expand that comment and explain mechanics. Be precise and it is OK if you generalize a bit to make a complicated concept understandable.

        On SDRs, all this does is allows one country, within the currency basket, to exchange their currency, through the SDR ratio, for another currency in the basket. The borrower pays the lender interest.

        All this mechanism does is provide liquidity in terms of forex reserves – at interest in SDR units. Stated simply, if the Chinese CB really, really needed dollars, they could print yuan, exchange them for the Fed’s dollars at the SDR ratio, and pay interest on the balance, also in SDRs, until they unwind the transaction.

        I akin this to taking a few accomplished swimmers and lashing them together for a coming storm – it ensures they all want to see each other live to see land again. It is, essentially, about preserving the existing system rather than establishing a new one – these objectives are at odds with each other, not aligned.

        Based on this understanding, I doubt the details of your other comments. So, enlighten us.

        I do think it very likely that if things continue as they have for some years, eventually a large group of countries will just “walk away” and trade amongst themselves in whatever currency they choose. This was the comment you responded to. This might be at the risk of war to preserve the old system, but such as it is.



      • wratfink says:

        There is some confusion (at least in my mind) as to who and what the IMF actually is.

        My interpretation of reading the IMF charter is that it is a wholly owned subsidiary of the corporate US government. It is headquartered in DC and the US shares constitute the biggest part of the “basket”. They also, by virtue of shares, control any vote up or down .

        But the biggest tell for me is when reading the “Final Provisions” of the charter, it states that all participating countries (188) must deposit a percentage of gold into a US government account in order to participate… NOT an IMF account.

        This tells me that the IMF will not do any damage to the dollar’s reserve currency status…it is owned by the US government.

    • Nicko says:

      It will take decades to displace and replace the dollar…if it even happens.

      • d says:

        It will happen as the US $ replaced sterling in a similar time frame.

        However the replacement will be neither EUR in its present form or CNY.

        EUR: A stable lasting currency union, without fiscal union, is impossible.

        CNY the true number/volume in circulation has never been revealed. Further the china we deal with today, is only 65 years old, its is in reality a “Mafia State” and can not tell the truth about anything financial, even when its very existence, relies on it.

        China may be as the writer puts it becoming part of the IMF raft. However who in their wright minds would buy CNY and put it in their long term reserve portfolio.

        As another wrote

        “Not worth a contenetial” is apt. when considering CNY.

        Before adding the fact that when going to sleep, one has no guarantee that when awakening, one discovers that the CCP have devalued CNY by 50 or 500 % as the mood takes them, or clandestinely physically printed another sever trillion CNY, and used it to pay their overdue international accounts.

        When the US stops regularly advising the volume US $ in circulation #, trouble will already be here..

    • Mark says:

      And all of them are in DEEP SH…., just wonder why???
      There is no better place to be but in North America to survive financial and any other crisis. All crap is created (engineered) here and exported overseas.

      “All is good, all is good, we all live in Hollywood…” – Red Hot Chilly Peppers

  7. Michael Gorback says:

    The dollar is the leper with the most fingers. Tell me which fiat currency you’d rather own right now.

  8. chris Hauser says:

    who holds this debt. can anyone tell me?


  9. Cynthia says:

    Dollars will be in high demand for as long as I can see. As another poster stated, dollar indebted nations will fight tooth and nail to get it. That great sucking sound you hear is dollars fleeing the USA for a nice new home abroad.

    Bretton woods set the dollar as the defacto reserve (sort of).
    There is no where else to put your money other than real estate. The dollar is a safe haven relative to the alternatives.

    Didn’t you tell us to sell Canadian dollars at USD/CAD = $1.33????

    • Wolf Richter says:

      I don’t ever tell anyone to sell (or buy) anything. That’s not what I do. I expect people to make their own decisions.

      I try to supply some info and food for thought.

    • OutLookingIn says:

      Cynthia –

      “There is no where else to put your money other than real estate”.


      Firstly, learn what money truly is. Physical gold and silver.
      All the rest that purport to be “money” are nothing more than fiat currencies. FIAT [latin] ‘let it be’ a decree.

  10. ejhr2015 says:

    Any sovereign nation which borrows US dollars is asking for trouble. It surely is unimaginably incompetent to do so. Only the USA can control its dollars. No other nation can direct it. Normally if your own country gets into trouble the US dollar will only rise up and make the debts worse,
    and you can go bankrupt. You can never go bankrupt in your own currency so only use it! The US can issue its dollars forever so to speak and thus buy its way out of trouble.
    Today it would be possible to make banks take a haircut by forcing repudiation of the fiat supplied loan principal sums. That’s money they contrived out of thin air. So writing that off does not affect the banks depositors as those deposits don’t figure in loans any longer noe fractional reserve lending has been superceded. So no bail-ins and no bank defaults at least as far as depositiors are concerned. One could also strike down all the secondary and derivatives markets for the same reasons.
    It would be a sound way to reset the economy.

    • Dan Romig says:

      Well stated ejhr. I do not pretend to be an economist, but I think it is a question of a lesser of two evils for an emerging market nation seeking capital: Do we borrow in dollars (which we convert to our own currency for investments) at a lower rate, or do we borrow in our own currency at a (much?) higher interest rate?

  11. Yoshua says:

    With $10 trillion in debt, falling oil and commodity prices, a strong dollar, rising interest rates and a global economic slowdown, the indebted corporations in emerging markets will soon start to default on that debt ?

    The corporations (oil and mining) will go bankrupt and their stocks will be picked up for pennies by the banks connected to the Fed with $2.3 trillion sitting at the Fed waiting for that moment ?

  12. Yars says:

    I wonder if anyone factors in U.S. foreign policy (or better said: The ramifications thereof), into their equations for the future of the $USD…? If not, it might be a good idea to grab that globe you purchased years ago to help your kid/s with their geography lessons, and follow the news (not U.S. based preferably if you value truth…), of what is taking place – in real time, right in front of you… History is being made, almost by the week in the geopolitical arena. Unfortunately, if you reside in the U.S., this ‘history’ is taking a decidedly unfavorable route…

  13. Chicken says:

    Isn’t Chinese government urging Chinese companies to issue $US denominated bonds? Not sure anyone can justify buying them.

  14. Boris says:

    It’s great to be a Yank. I’m planning a long international vacation at present. First stop will be Bavaria for sight-seeing and carbo-loading on the good food and beer. Then we’re off to trek in the Austrian Alps. And more good food and beer. Take the train then to Rome. For some rest. Next stop is Kathmandu and an extensive trek in the Himalaya. Not sure where to go next. Hey Wolf, feel free to come along for part of the adventure!

    • Wolf Richter says:

      Would love to come along. But I’m kinda busy here.

      Don’t forget to eat some Eisbein while in Bavaria. And of course a Spanferkel.

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