Daily Commentary

MarketMinder’s View: This article argues the strong US dollar is a “significant concern” not only for Emerging Markets (EM), but also developed because depreciating currencies can spur inflation, which could force them to hike rates, weakening their economies. While we agree with the assessment documented here that the dollar is strengthening because US rates are relatively high and many investors expect them to remain that way versus rate cuts anticipated elsewhere, we don’t subscribe to the notion it is necessarily problematic. For one, attitudes could easily shift given rate trajectories aren’t set in stone—and central bankers are notoriously unpredictable. Most glaring, in our view, the article cites Turkey as a victim of dollar strength, but the Turkish lira has fallen for decades against the dollar whether the Fed was hiking or cutting. While it takes two to tango in currency markets, we suspect Turkey’s economic mismanagement is more to blame for its woes than a strong dollar. Second most glaring? The implication that Sri Lanka’s 2022 default was about the strong dollar. For one, it isn’t in EM—it is a Frontier Market. But also, its crisis predated the strong dollar in 2022, as it was largely tied to tourism getting decimated in the pandemic, huge inflation, a lack of foreign currency reserves and a political crisis. Most EM and developed markets don’t face these predicaments. Besides, the reason why many EM got into trouble in the late 1990s wasn’t US dollar strength per se, but because of fixed exchange rates with the dollar they weren’t able to defend. Nowadays, nearly all countries’ currencies float and most EM have ample reserves to back them if deemed necessary. This is why 2022’s dollar strength didn’t cause a vast crisis, despite some fears at the time.

MarketMinder’s View: No, Japan’s exports didn’t “surge” to extend a streak of four straight months of growth. That is only true in value terms—those denominated in yen. That is inflated by the yen’s extreme weakness of late. In volume terms, which the Ministry of Finance reports in the same press release, exports fell -2.1% y/y in March, the second-straight decline after February’s -1.5% and the 9th drop in the last 12 months. While this is a very niche statistic and one that we don’t think reflects sentiment broadly, we see this as a reminder to investors: Make sure you dig into the actual data rather than accept coverage at face value. It could lead you to incorrect conclusions.

MarketMinder’s View: The titular problem is a common belief and when a widely watched supranational body like the IMF parrots financial myths surrounding American debt, it can amplify investors’ fears unnecessarily. So let us review them. For fears to gain traction, they often carry a kernel of truth, which in this case is that long-term developed world government debt outside America is highly correlated with US Treasury bond yields. They tend to zig and zag together. So, the IMF’s thinking goes, “‘Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar,’ Vitor Gaspar, director of the IMF’s fiscal affairs department, told reporters. ‘It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks.’” The IMF also claims “loose fiscal policy” is keeping inflation elevated. But, in our view, this overrates fiscal policy. US fiscal policy may be loose (or tight), but it likely has little influence on domestic inflation, much less globally. Global inflation expectations largely drive interest rates—which is why developed market bond yields typically move together. Fundamentally, though, as Milton Friedman taught, inflation is caused by too much money chasing too few goods and services—and money supply globally is shrinking, while output of goods and services is increasingly expanding. This is all disinflationary despite recent wiggles in US inflation data. So generally, we see this rather differently than the IMF.