“Our currency, your problem.” John Connally, Treasury Secretary in the Nixon White House, uttered these words to the world’s elite when he torpedoed the Bretton Woods regime’s gold link to the US dollar in 1971. Fifty-one years later, the world is still paying a terrible price for the US dollar’s role as the dominant reserve currency. The US Dollar Index (DXY) is up 20% in the past year as the euro, sterling, yen and most EM currencies have all gone into free fall.
The US dollar benefits from the Fed’s tight money policies, growth collapse in the EU and China, safe haven flows tied to the Ukraine war, the weaponisation of Russian gas exports by the Kremlin and a systemic sovereign debt crisis that could afflict 70 emerging markets in 2023. This means we face an ominous replay of the intercontinental hot money contagion that followed the 1994 Mexican peso devaluation, the 1998 Asian currency meltdown, the 2001 bankruptcy of Argentina/Turkey and 2008 failure of Lehman Brothers.
“Since the GCC currencies are pegged to the US dollar, local central banks are forced to shadow the Federal Reserve’s draconian interest rate hikes”
