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The global dollar short squeeze

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  1. skybrian
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    From an article written in February 2020: [...] The currency chart from the article was discontinued at the beginning of the year, but here is the suggested replacement.

    From an article written in February 2020:

    The risky part of this system is that many foreign governments and corporations borrow in dollars, even though most of their revenue is in their local currencies. The lender of those dollars is often not even a U.S. institution; foreign lenders often lend to foreign borrowers in dollars.

    This creates currency risk for the borrower, a mismatch between their revenue currency and their debt currency. They do this because the borrower can get lower interest rates by borrowing in dollars rather than their local currency, thus taking on currency risk themselves instead of the lender taking on that risk. Sometimes, dollar-denominated bonds and loans are the only option for them.

    By doing this, the borrower is basically shorting the dollar, whether they want to or not. If the dollar strengthens, they get hurt, because their debts rise relative to their local-currency income. If the dollar weakens, they get a partial debt jubilee, because their debts fall relative to their local-currency income.

    [...]

    When the United States finished its third round of QE in late 2014 and shifted to tighter monetary policy, however, the dollar shot up and has remained elevated, in what has become the third dollar spike of modern financial history. A combination of looser fiscal policy and tighter monetary policy than the rest of the developed world from late 2014 to the present has been a recipe for a strong dollar, while it lasts.

    In 2018, the strong dollar broke Argentina and Turkey’s currencies and drove the countries into recession, which is similar to what happened to several emerging markets in the late 1990’s. Argentina and Turkey had (and have) a large amount of dollar-denominated debt relative to their GDP, and low foreign-exchange reserves. Argentina’s dollar debts are mainly sovereign (Argentina’s government), while Turkey’s dollar debts are mainly with Turkish corporations.

    The currency chart from the article was discontinued at the beginning of the year, but here is the suggested replacement.