The strength of the U.S. dollar is a serious underpinning, even though its price action has backed off recently after a year-to-date advance of around 10%. In the world of developed currencies, that increased valuation is huge. The chart below of the U.S. Dollar Index shows how the greenback has done against the five major developed country currencies that include the euro, yen, pound sterling, Canadian dollar and Swedish krona.
One can see how the euro is heavily weighted in the Dollar Index (57%). Though the dollar’s rally vis a vis these currencies has been impressive, it doesn’t put any color on what has and still is taking place with the pain being exacted on emerging market currencies. It will be interesting to see where the dollar trades going forward, given that the largest weighting in the euro represents a region where growth from the 19 countries that make up the euro zone slowed to an annualized rate of 1.4% in the second quarter from 1.5% in the first quarter. It was the slowest expansion in three years. Fear that new tariffs will slow global commerce has been weighing on the outlook in the Europe, which is heavily dependent on trade.
Among emerging market currencies there is chaos, confusion and fear that is driving an exodus from those markets into the U.S. dollar. Below is a table of the countries that make up the MSCI Emerging Market Currency Index. The Brazil real, Russian ruble and Chinese renminbi comprise 49.8% of the entire index. Brazil is the eighth-largest economy in the world and is in urgent need of addressing its shaky public finances. With over $1.5 trillion in public debt, a Brazilian debt crisis has the potential to cause real waves in the global financial system. As for China, its government is reported to be manipulating its currency.
Unbeknownst to most investors, India has the second-worst debt problem in the world right behind Italy. Bloomberg reports that India’s $1.7 trillion formal banking sector is presently struggling with $120 billion in bad loans, most of which are concentrated within its state-owned banks. With 2018 growth slowing to 6.7% from 7.1% in 2017, the trend for a further rise in bad loans looks worse.
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