World Economy

Rising Dollar Could Trigger Global Financial Crisis

Rising Dollar Could Trigger Global Financial CrisisRising Dollar Could Trigger Global Financial Crisis

For the first time in nine years, the United States is ready to hike interest rates. Meanwhile, major central banks around the world are still engaging in enormous quantitative easing programs to jump-start their economies.

Japan has dipped back into its fourth recession in five years despite the most massive quantitative easing experiment the world has ever seen, Business Insider reported.

Slow economic growth and low inflation has the European Central Bank considering another dose of quantitative easing.

China’s central bank may be on hold after its two-day devaluation in August wreaked havoc on global markets. The PBOC doesn’t want to risk losing its bid to have the yuan included in the IMF currency basket.

This growing divergence in central bank policy around the world has created a great imbalance in the global economic order, which establishes the very real potential for a rising dollar to trigger the next global financial crisis.

Mega Bull Market

The divergence in economic growth and central bank policies has caused the dollar to break out in a big way. The US Dollar Index broke out of a 30-year downtrend that began with the Plaza Accord way back in September 1985. There may be a new mega bull market forming in the US Dollar.

The rising dollar is a big problem for the massive amount of dollar denominated debt held outside of the US. And this trend could very well be the trigger for the next global financial crisis.

Low interest rates in the US have led to an explosion of borrowing in dollars around the world—especially in emerging markets.

Debt Build-Up

Data from the Bank of International Settlements show that there is over $9.7 trillion in dollar-denominated debt held outside of the US—up from $5.6 trillion at the end of 2008.

Companies and governments in emerging markets have borrowed in dollars because of the ultra low interest rates available, but they earn the money to pay back those loans in local currencies. It becomes more expensive to repay the loan with every uptick in the dollar and sinks the company further into debt.

The build-up of debt in emerging markets poses the "most meaningful risk" to the global financial system right now, according to the former chairman of the Federal Reserve.

Ben Bernanke said the world had failed to learn lessons from the Asian crisis in the 1990s when local banks and non-banks borrowed in dollars but lent to domestic projects in local currencies.

Speaking at an event organized by the Spectator in London, Bernanke said: "One thing that puzzles me a bit is that we thought we learned in the nineties that currency mismatches–that borrowing in dollars and then lending in whatever the local currency was–was a dangerous thing."

Financial Storm

A Chinese recession could rock the UK and Irish export markets, if fears of a financial crisis in the global powerhouse are realized, it's been claimed, Business News reported.

As growth in China slows, economists are increasingly in agreement that a Chinese recession looks to be on the cards.

China's economy grew 6.9% in the third quarter of this year, the weakest rate since the global financial crisis began in 2008.

Speaking at a breakfast event, Bank of Ireland UK economist Alan Bridle said comparisons could be made between patterns seen in European countries in the lead-up to the financial crisis and China's current slowdown.

He said that a rapid rise in the percentage of borrowing compared to GDP had also been typical in several countries in the lead-up to the 2008 recession.

In 2008, Chinese borrowing was 31.67% of GDP–but that figure has risen by 10% over the past seven years.

Security Threat

Three days after the deadliest attacks on French soil since World War II, leaders of the world’s largest economies signaled growing worries that security issues could sabotage an already weak global economy.

“Geopolitical challenges are increasingly becoming a global concern” leaders of the Group of 20 industrial and developing economies said in an official communiqué after two days of talks, on Nov. 16, even as they said global growth “continues to fall short of our expectations.”