The Consequences of a Strengthening US Dollar

In early September, I made the case for a rising U.S. dollar, based on the basic supply and demand for dollars stemming from four dynamics:

  1. Demand for dollars as reserves
  2. Other nations devaluing their own currencies to increase exports
  3. “Flight to safety” from periphery currencies to the reserve currencies
  4. Reduced issuance of dollars due to declining U.S. fiscal deficits and the end of QE (quantitative easing)

Since then the dollar has continued its advance, and is now breaking out of a downtrend stretching back to 2005—and by some accounts, to 1985:


Technically, the Dollar Index has broken out of a multi-year wedge:

So what does this mean for the global economy?

Since currencies are intertwined with virtually every aspect of the global economy—trade, credit, inflation/deflation, commodities and capital flows, even political and soft power—there is no one consequence, but a multitude of interactive consequences.

For U.S. households, the rising dollar will have gradual, generally marginal effects: our dollars will buy more euros and yen when we visit Europe and Japan as tourists, imports from countries with weakening currencies will be slightly cheaper (if the importers don’t palm the difference as extra profit) and we may be competing with more foreigners for dollar-based assets such as American homes, oil wells and Treasury bonds.

In sum, a rising dollar will only affect households on the margins. Since roughly 85% of the U.S. economy is domestic, imports and exports have relatively limited influence on the entire economy.

In other words, the direct consequences of a stronger dollar on U.S. households are generally positive, with the exception of those working in price-sensitive export industries, where the rising dollar will make goods sold in countries with weakening currencies more costly.

But the secondary effects could end up being far more consequential for Americans and everyone else on the planet, for this reason: the centrality of the dollar in the global economy means that the effects of a stronger dollar can create potentially destabilizing dynamics. 

Central Banks Are Responsible for the Heightened Risk

One primary reason for this expansion of risk is the unprecedented actions of the world’s central banks since the 2008 Global Financial Meltdown. In effect, the central banks doubled down on debt and leverage as the politically expedient “solution” to the implosion of credit and leverage (what we call de-leveraging) as the collateral underlying highly leveraged loans (think subprime mortgages on overpriced McMansions) evaporated like mist in Death Valley.

Any solution that forced the write-down or write-off of the mountain of bad debt would have collapsed the over-leveraged banks which had become linchpins in the global financial system.

So the only way to maintain the status quo and avoid handing massive losses of wealth to financial elites was to issue trillions of dollars in new credit-money, lower interest rates to near zero and start buying assets from private-sector owners, turning their assets into cash that could then be used to invest overseas or in domestic stocks and bonds.

Each major central bank injected unprecedented sums of new money into their economies to ease the refinancing of debt at lower interest rates and enable expansion of credit for new loans.

If each economy (or in the case of the European Union, currency region) was moated by strict capital-control regulations, this massive goosing of credit might have been contained within each economy.

But in today’s world of digital finance, capital, credit, risk and interest rates all flow wherever the risk is perceived to be controllable and the return is greatest.

Let’s pause for a moment to recall that risk in 2008 was perceived to be controllable right up until the day that Lehman Brothers declared bankruptcy and the global financial system erupted in a fireball of panic and liquidation.

Why was risk considered controllable right up to the implosion? Derivatives and hedges were widely assumed to be solid protection against any spot of bother in global credit markets. But this confidence was misplaced, as it ultimately relied on multiple counterparties retaining their solvency.  If a position was hedged by a derivative that was to be paid by a counterparty if things went south, and the counterparty blew up before the hedge could be paid off, there was no hedge.

It turned out that liquidity—a market of buyers and sellers that allows any security to be sold more or less whenever the seller decides to sell—dried up, and markets for risky securities went bidless, i.e. there were no buyers at any price.

If there are no buyers, the value of the security drops to zero, and everybody down the line who counted on that security fetching the anticipated price so their hedge could be paid off also implodes.

Central banks countered this implosion by buying bonds and mortgages and lowering interest rates so old debt could be refinanced at much lower costs.

But in doing so, they created a vast market for global carry trades—the borrowing and buying of assets in various currencies to take advantage of yield and interest-rate differences.   In the old pre-digital days, it was difficult to arbitrage these variations in national currencies and interest rates. But in today’s world, it’s easy for financiers and financial institutions to borrow money in dollars or yen at low interest rates and re-invest the money in higher-yield securities issued in other countries.

The Problem with Carry Trades and Cross-National Debt

The central bank’s massive issuance of new money put trillions of dollars in the carry trade, and this vast expansion of global currency/interest-rate arbitrage has put currency values front and center.

The carry trade simply means cheap-to-borrow money in the US and Japan flows to emerging markets where rates are higher.  If you can borrow $1 billion at a 0.25% rate in the U.S. or Japan and then buy emerging-market bonds that pay much higher yields, why not?  The profit is free money.

The sums of money being gambled in carry trades are enormous. It is estimated that $7 trillion of emerging market debt is denominated in another currency. According to the Telegraph newspaper (U.K.), roughly two thirds of the $11 trillion in cross-national loans are denominated in U.S. dollars.

$11 trillion may not seem like much when compared to America’s $16 trillion gross domestic product (GDP), but the emerging markets which have been the happy recipients of this vast river of capital have much smaller economies and credit markets.

They also have fewer options to refinance debt, as they lack heavyweight central banks like the Bank of Japan, the European Central Bank and the Federal Reserve.

As a result, these capital flows are extremely consequential and thus potentially disruptive.

Here’s the risk in carry trades: if the currency you borrowed the money in strengthens and the currency you’re receiving the interest payments in weakens, the deal sours. The rise and fall in currencies can erase the profits of the carry trade.

If the currencies weaken/strengthen beyond break-even, a once-profitable trade turns into a losing trade.

And how do you extricate yourself from the carry trade? You sell the emerging-market assets and repatriate the money back into the currency you borrowed the money in: for example, the U.S. dollar.

This has immediate supply-demand effects on currencies. The emerging-market currency that’s being sold drops in value while the currency that’s in demand (U.S. dollars) strengthens.

We might imagine that the Federal Reserve ending its vast money-issuance program of quantitative easing would lessen the global risk posed by the carry trade, as it reduces the flood of dollars seeking higher-yield homes outside the U.S.

But this tightening has actually increased the risk of carry trades blowing up and bringing down emerging-market economies, for it reduces the flow of fresh capital into emerging markets.  As the supply of dollars dries up, demand for dollars rises as carry trades are unwound.  Emerging-market currencies then weaken significantly, causing profitable carry trades to reverse into losing trades, which then causes those holding debt in dollars and assets in other currencies to dump the assets and pay off the dollar-denominated debts before the trade goes even more against them.

There is a positive feedback in play: the more the dollar rises, the greater the losses in carry trades denominated in the dollar, and the greater the incentive for those still in the trade to sell emerging market assets and currencies.

In response to these massive outflows of capital, emerging nations must raise interest rates quickly to offer incentives for capital to stay put, which then causes the cost of new loans (and doing business in general) to quickly rise to painful levels.

As the currencies suffering outflows decline against the dollar, imports become more expensive and exports lose value when traded for dollars. It’s a triple-whammy for emerging nations: their borrowing costs are soaring, the capital leaving to pay off dollar-denominate debt leaves them starved for investment capital, and their imports rise in cost as their exports earn less.

So here is the net result of central banks pursuing quantitative easing and zero-interest rates: a massive increase in global risks resulting from the carry trades the money expansion and cheap rates fueled.

The central banks’ “solution” has blown another global bubble of risk that now threatens to destabilize not just the carry trades but the economies and credit systems that have become intertwined with the carry trade.

In effect, the failure to address the structural problems revealed in the Global Financial Meltdown of 2008-2009 have been transferred to the larger foreign-exchange (FX) market, which is connected to virtually everything in the global economy.

In Part 2: Why The Strengthening Dollar Is A Sign Of The Next Global Crisis, we examine these risks to the global economy. Not only is a rising dollar a sign of weakness elsewhere in the world, but the higher it rises, the more destabilizing global currency imbalances become. If it rises too high, it then becomes a cause of further destabilization -- one that could trigger the next global crisis. 

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

This is a companion discussion topic for the original entry at

In early September, I made the case for a rising U.S. dollar, based on the basic supply and demand for dollars stemming from four dynamics:

  1. Demand for dollars as reserves
  2. Other nations devaluing their own currencies to increase exports
  3. “Flight to safety” from periphery currencies to the reserve currencies
  4. Reduced issuance of dollars due to declining U.S. fiscal deficits and the end of QE (quantitative easing)

Since then the dollar has continued its advance, and is now breaking out of a downtrend stretching back to 2005—and by some accounts, to 1985:


Thanks for an interesting pair of articles, Charles.  Davefairtex has stated that, all else equal, a rising dollar is bad for gold (in dollar terms) and a falling dollar tends to push the price of gold up.  

realize that technical analysis is not the only way to look at this, but if TA and the positive feedback of unwinding the carry trade and the more general trend of a flight to perceived safety in a financial crisis all suggest a continued dollar rally, then, all else equal, won't the price of gold tend to stay low?

Of course, all else may not remain equal:  If the prices of gold and silver remain below all in production costs then supply may fall and price may rise.  If oil production falls further into the steeper decline slope on the right side of the Hubbert curve, then the cost of all commodities might rise (but we don't seem to be really close to that point at present.)  If the division between the physical PM market and the paper Comex market were to fall away for some reason then the price of gold and silver would probably rise.  But, those supply related possibilities, so popular with the likes of Andrew Maguire and Stephen Leeb, have not really manifested themselves in terms of price in the last couple of years.  Whereas, a strengthening dollar does seem to have pushed PM prices down.

So, is it fair to say that we're unlikely to see a major rebound in PM prices until the trend in a rising dollar is finally bucked?

Of course, this is a complicated picture, but if the message is "the dollar is likely to make further gains" then I think one basic conclusion might be, "then gold and silver may be in for some more months (or years) of quagmire."  

I would still probably engage in physical PM purchases in such a price quagmire, but I might also be very reluctant to buy PM miners.



Hi Hugh:
Excellent question that is on many minds. In a previous essay published here, I posted a long-term chart of gold and one of the USD to show that the correlation is sporadic/weak. I don't think they're as correlated as many assume–just look at the USD during gold's ascent from $500 to $1900–did the USD make an equivalent move down? No, it has noodled around in a trading range for a decade, rising in periods of crisis (2008, the 2011 Eurozone crisis, etc.) and declining when the risk-on carry trade sent USD to emerging markets. When risk-off was in fashion, USD rose.

I have long seen USD and gold as flight-to-safety options, and so I don't see any reason why they can't both go up in a risk-off era.  If oil were to go to $40/barrel and stay there, oil exporters might have to dump their gold reserves to keep their government afloat. But barring that kind of spike in supply/demand, I expect gold to loft higher along with the USD. I know this puts me in the minority, but gold and USD are different kinds of reserves and so there is demand for both, not one or the other.

We'll see if this prediction that gold and USD go up together works as well as my call for a stronger dollar :slight_smile:

Aloha! Everything "is" until it isn't! Even a sitting President once asked in his defense "It depends on what your definition of "is" … is!" So even "is" is debatable! And as George Orwell points out in the first sentence of his book 1984 … " … the clocks struck 13!"
In these days of the Korruption Kulture" there is a "new" paradigm for every thing. During the late 1990s the bubble in the NASDAQ was explained away as "the new paradigm". Warren Buffet dissented!

I think I will stick with the old paradigm of "desperate money flows in a corrupt world". No doubt money will flow into the USD as the Euro tanks and the Yen finds export nirvana, but that is really the "lesser evil" mentality. No doubt the world is over saturated with debt that far exceeds anything related to population size and of course interest rate derivatives are off the charts. It all spells "leveraged wealth" that only the greater fool can be enthralled.

I would have to say YES the gold price can rise along side an increase in the USD and in fact gold has demonstrated it can even rise in a high interest rate environment, like a FFR at 6%! It was only 2006 when the FFR was at 5.75%! Okay, I define "high interest rate" as 5.75% even though we all know that isn't that high compared to the 1980 rates. In fact it wasn't too long ago that a FFR at 5% was accepted as normal and even a real estate boom happened then also! Still it is amazing what a few years of QE brainwashing can do as most of us feel cataclysmic at the thought of a FFR at 1%!

Gold is an oddity. The US Treasury holds the largest single global reserve of gold and if you add in the NYFed vaults that hold foreign gold reserves in trust then within the US borders gold has been hoarded most, but not by its citizens as it was in 1933 when FDR decided that the US Treasury needs to be the biggest gold hoarder in history. And so it has been since Bretton Woods days. The US government hoards gold! It also seems to hoard the largest nominal sovereign debt as well. I guess it's called having your cake!

Obama writes some more Executive Orders abolish the COMEX and make gold $7000 per ounce and the US Debt is gone! Never underestimate the power of politicians with Executive Orders. 

Pure and simple global corrupt governments eliminate more and more "safe havens" to park massive currency. At the week before the end there will only be the USD and US Debt and I am sure gold will be one of the "go to" hard assets to convert paper wealth along side art and real estate. In such times of corrupt debt though the certificates of companies holding "hard assets" will also rise. Of course given the new era of computer trading whereby paper certificates are no longer actually held the parking of one's certificates at the most solvent of brokerages will become crucial. Wealth will be squandered at those anointed entities for sure. That $13BIL JP Morgan settlement wasn't for nothing! It was a dry run, like Cyprus. It only paves the way for the future of "bail-ins"!

But then none of this is a new paradigm. Unless Rome is suddenly new! Give CNBC a year and they will convince the masses that Rome was built in a day … in fact it was just yesterday! Euphoric hubris does that!

imports from countries with weakening currencies will be slightly cheaper (if the importers don’t palm the difference as extra profit)
I work for an importer and our customers are out ahead of the trend so much that we're seeing downward price pressure on old inventory. They receive new price offers from importers with lead-time which makes the in-stock price look high.  The effect of that will be for companies like mine to avoid long inventory positions during times of falling and instable prices which leads to supply disruptions usually caused by domestic producers seeing the opportunity and declaring "force majure" which allows them to profit handsomely in under supplied markets (funny how "mechanical failures" always happen when markets are short inventory).  When that happens and inventories are low it can take ~4-16 weeks for replacement material to arrive in sufficient volumes to stem the bleeding and another month or so after that for pricing to stabilize.  During periods like this (a recent example was the Japanese tsunamis which took a lot of capacity offline), I've seen prices that are usually stable within +/- 5% for years at a time more then double in a matter of days.  If enough supply interruptions happen in unison, things could get real interesting in a hurry. Those are the times that importers pocket extra profits and ask all but the most reliable accounts to pay cash in advance due to the risk that prices come down before the material arrives and customers rescind on orders.

Another impact I can anticipate is lower tax receipts for locations like TX and NJ that charge a inventory tax based on the value of inventory held in stock at the end of the year.  Importers tend to dump inventory going into the end of the year in those places anyway and this current trend will only aggravate that.  My guess is that Q1 next year is going to see some wild price fluctuations in cyclical non-market-traded industrial commodities (is there a term for that category).

On the home front, I am headed out this afternoon to buy burlap to keep some of the young fruit trees I planted this fall from dying in the early freeze.  19 degrees out when I woke up this morning…anyone have suggestions on how to keep livestock water from freezing on the cheap? (You can PM me so we don't take this thread too far off topic) :slight_smile:

the gold goes way lower still. The powers that be have that part of the market rigged to their satisfaction and will not now allow gold to rise with the buck unless of course it wants too. Oil will go way low and possibly in that $40 dollar range. I have learned this, if you have a sellable asset it gets dumped first to try and keep what you can. In the end, you may not have anything except the greatest wealth transfer in world history. Hope I guessed right. King Dollar has been my play along with shorting oil which I thought back in 2008 would never happen.

I believe that about as much as I believe the government reported inflation figures.
I'm far from an expert, but I'd say we are around two years away from loosing the global reserve currency dollar support.  The SCO is hard at work on that and they will soon make up the majority of the worlds population, if they don't already.

When that happens, the safe haven perception vanishes as well.


Hi Les and all,
There is pretty good evidence that US deficits are falling.  I'm with you in terms of not trusting the official inflation numbers put out by the BLS and the Fed.  As John Williams, Chris, and others have demonstrated, there is good evidence that these numbers have been juked via changes in how inflation is defined and measured.

This doesn't however, mean that all government numbers are wrong all of the time.  Chris routinely uses stats from the US Energy Information Agency in his work, as do many other peak oilers.  While it's important to be careful with some of the EIA's dodgy designations (e.g. total oil production), overall it seems that its data is trustworthy enough to be useful.

It also seems that the data coming from the OMB and the CBO, which suggests that deficit as a percent of GDP is falling, is reliable in this context.  While there are some whole categories of liabilities that are not counted, such as those for Social Security and Medicare, this has been constant over the whole time period we're looking at, so even if one rejects the exact percentages, the trend is still falling deficits since the very high deficit of 2009.

Also, this is a trend that is common to the vast majority of OECD countries, so it seems to be a trend based in reality, as opposed to a lie, a damned lie, and or a statistic.  :)

Whatever frustration people feel about the leadership in the White House and Congress, one thing that cannot be truthfully said is that our representatives have increased deficits in the last three years or so, either in absolute terms or as a percentage of GDP.



Jim Puplava and Catherine Austine Fitts take us Doomers to task in this video. Jim pays lip service to Peak Oil but says that the fracking extends the game and gives us a chance to mitigate the effects.
He also claims that money in the collapsing periphery will flood into the US, feeding a second American Century. 

CAF notes that the economic circumstances of the USA vary considerably, with each area thinking that their conditions reflect the situation of the entire country. If you live in a poor area you will think that the entire countries economy languishes, and vice versa.

They both believe that the "Central Corridor" is the best place to be and that Warren Buffet exercised foresight in buying up railroad.  This Railroad Renaissance will warm the cockles of one Jim Howard Kunstler's heart. (And mine.)

I would say that the Geographic distribution of wealth disparity is going to show a self-similarity at different scales, with some regions soaking up wealth from their outlying areas. At all scales. The largest scales will be cultural. And the internet is making short work of our cultural differences.

The effects of automation on career choices are discussed.

However, everyone is assiduously ignoring the Limits to Growth report. If ever their was a an idea that I have that I fervently wished was wrong, it is that one.


What's more fun that a midlife crisis?  <multiple expletives deleted>
A midlife global economic, energy and environmental crisis. 

I really don't care much for those LTG charts either Arthur. 

it's possible you are right based on GAACP.  I won't bother to look into it at this exact moment.  Here's why.  First, combine deficits and government liabilities and determine if the combination is going up or down.  Second, looking at deficits alone, are they going down, if they are, because of a robust economy, or perhaps because of increased tax revenue from investment income due to a run away financial market.  Basically, is the reason the deficit is declining due to sustainable phenomenon, or not.  If not, you don't invest in dollars based on a temporary and shaky phenomenon, except as a risk on short term position.
Finally, the US government is gigantic.  They can, cook the books to the tune of billions of dollars, if it's in their interest.  Heck, I've seen a large corporation cook to the tune of 10s of millions on a short term basis, without flinching.

Yes, I am with you that the falling deficit is probably not sustainable and is likely to rise when the next economic crisis hits and is followed by a round of bailouts and stimulus spending. 

If one doesn't trust the government inflation numbers, then how can one trust the GDP numbers? Therefore the Deficit/GDP is B.S.   Furthermore, the government uses cash accounting ignoring roughly $5.5 Billion is GAAP Deficit (primarily due to IOU NPV for the Welfare State promises up ahead).

Kaimu wrote
Gold is an oddity. The US Treasury holds the largest single global reserve of gold and if you add in the NYFed vaults that hold foreign gold reserves in trust then within the US borders gold has been hoarded most, but not by its citizens as it was in 1933 when FDR decided that the US Treasury needs to be the biggest gold hoarder in history. And so it has been since Bretton Woods days. The US government hoards gold!

I'm not saying categorically that this is wrong - I have no way of knowing directly but I have developed a strong distrust of official figures. There has been widespread speculation on this site and elsewhere that over time most of the wests gold has been dishoarded and bought up by the east.

Alisdair Macleod, in a conversation with Chris a few months ago suggested China had increased gold reserves by 4,000 tonnes in the last year alone. In an recent article at he outlines an argument that China acquired at least 20,000 tonnes of gold prior to 2002 (officially reported reserves were just over 1,000 tonnes). 

But this comment is not really about gold. With the seemingly unstoppable surge in the sharemarket and wave after wave of PM smashes I've had to re-evaluate my own assesment of where this is going and in what time frame. Like everyone else here I'm trying to form a coherent picture of what's unfolding amidst a storm of conflicting signals.

Last week Chris wrote an article titled "Central Planners are in a panic". I agreed with this line of thinking and suspect price suppression of precious metals is part of their strategy of maintaining confidence in the fiat money system even though continued price suppression seems to be resulting in western vaults emptying and gold flowing east. Why else would they pursue such counterproductive measures? This is incredibly damaging in the long term.

If indeed central planners are desperate, panicking, out of options and prepared to do anything for short term relief it tells us where we are in the story. And understanding this helps with our own planning.

And yet the US$ is strengthening… Charles, I understand your reasoning here and you have been right. But with a strengthening dollar I can't see the need for the latest hit on gold. I've read your comment on Gold and USD so perhaps, with a strengthening dollar there will be less reason to pummel gold? I'm interested in your thoughts and whether you too see panic and desperation in central planners actions.



There are two sources for "the current deficit" - one is by taking the US treasury monthly statement and subtracting outlays from revenues, while the other is by taking the actual daily total outstanding debt of the US government from Treasury Direct and calculating the change year-over-year.  Note: this second method includes social security debt too.Chris got fussy about the MTS deficit numbers last time I posted, so I'll supply the TD debt y/o/y chart.  While the annual deficit isn't half a trillion like MTS says, it quite clearly trending lower.  The downtrend is even more apparent if I were to apply a moving average that smoothes away the seasonal variations.
[FWIW, the Treasury Direct deficit of just the "public debt" (i.e. no social security) is about 300 billion lower]
And here's that same deficit number divided by GDP - the "deficit to GDP ratio".  Notice how the deficit is lower as a percent of GDP than it was during the Bush years.  Of course this is lies to a certain extent since GDP is artificially bloated up by BLS using an artificially low inflation number, but here's what the great unwashed will see…