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The U.S. dollar continued to surge against practically everything on Wednesday, underscoring a desperate global dash for liquidity that was blamed for amplifying a worldwide equity selloff and volatility across financial markets.
“If cash is king, then dollar cash currently is world president. Everything that could be sold was sold against the dollar,” said Chris Turner, global head of markets at ING, in a note. And that’s not a welcome development right now.
The ICE U.S. Dollar Index DXY, -0.19% , a measure of the U.S. currency against a basket of six major rivals, traded at 100.47, up 1.4% and at a three-year high. A trade-weighted measure of the dollar, meanwhile, hit a new record. A 4% move against the British pound GBPUSD, -0.4133% that drove sterling to its weakest level since 1985, barring the 2016 flash crash, and a 7% jump versus the Norwegian krone USDNOK, +0.1107% were downright “disorderly,” Turner said.
Fears of a global credit crunch were exacerbated by the dollar’s rise, in turn contributing to broad-based selling of stocks and other assets, with even traditional havens such as gold and U.S. Treasurys under pressure. That in turn adds to demand for dollars, creating a vicious loop.
Stocks sold off sharply again Wednesday, with the Dow Jones Industrial Average DJIA, -6.30% closing below 20,000 for the first time since early 2017, leaving the blue-chip gauge down 32.3% from its all-time closing high, set just last month. The S&P 500 SPX, -5.18% has dropped 29% from its Feb. 19 record close.
“Clearly, if there is one currency causing problems right now and aggravating the selloff in global asset markets, it is the U.S. dollar,” Turner said.
A rising dollar serves to tighten financial conditions in the U.S. and for international dollar borrowers, who see the cost of repaying those loans rise. That adds to concerns about the global economic picture. Indeed, Christopher Wood, global head of equity strategy at Jefferies, said the rising dollar was the most ominous of a range of deflationary market signals.
“The strong dollar signals rising deleveraging pressures, and clearly the amount of U.S. dollar debt globally has risen significantly since the global financial crisis. Total U.S. dollar credit to nonbank borrowers outside America has increased from $5.8 trillion at the end of 2008 to $12.1 trillion at the end of [the third quarter of 2019], according to BIS data,” Wood said, in a note.
Traders and economists said the dollar surge reflects global demand for dollars among investors around the world as they exit down leveraged positions across financial markets. That’s why the Fed, as part of its Sunday package of emergency easing measures, also moved in concert with five other central banks to lower the rate on global dollar swap lines that were put in place during the financial crisis.
Zach Pandl, an analyst at Goldman Sachs, summarized what’s behind some of the global dollar demand in a Tuesday note, observing that international investors tend to hold many more U.S. assets than domestic U.S. investors hold international assets.
“This imbalance can have implications for currency markets. For instance, many non-U.S. investors own U.S. equities on an FX-hedged basis. When equity market cap declines, they are left with oversized hedges, and bringing the notional value of hedges down therefore generates USD buying,” he explained.
And since the U.S. market is so large, those flows tend to outweigh any dollar-selling flows by U.S. investors, Pandl said.
The dollar denominates most global commodity trade, most cross-border lending to emerging markets and an outsized share of global trade volumes, Pandl said.
The surge is seen reflecting a wave of forced liquidation as carnage across financial markets begets selling.
“The moves smack of massive deleveraging and a run into dollar cash — bearing all the hallmarks of a massive margin call on the whole financial-asset market rally since 2010,” Turner said.
Will authorities step in to try to soothe the market? If Group of Seven central bankers were to coordinate, it isn’t clear what they would do, Turner said. They could warn that they are watching developments and are prepared to intervene.
But in the current deflationary environment, it’s difficult to see the European Central Bank or the Bank of Japan agreeing to coordinated intervention to strengthen their own currencies, Turner said.
