Dollar Liquidity and the Risk of a Rapidly Rising US Dollar

A giant milkshake of liquidity has been created by global central

banks, with the dollar as its key ingredient.

But if the dollar moves higher, this milkshake will be sucked into the US,

creating

a vicious spiral that could quickly destabilize financial

markets.

The US dollar is the bedrock of the world's financial system.

It greases the wheels of global commerce and exchange.

The availability of dollars, cost of dollars,

and the level of the dollar

itself each can have an outsized impact on economies and investment

opportunities. But more important than the absolute level

or availability

of dollars is the rate of change in the level of the dollar.

If the level of the dollar moves too quickly, and particularly if the level

rises too fast, then problems start popping up

all over the place. And that's why everyone should have a plan

for a rapidly

rising dollar. It doesn't need to be a base case,

but it never hurts

to be prepared.

Today however, many people are convinced that both the role of the

dollar is

diminishing and that the level of the dollar will only decline.

People think that the US is printing so many dollars

that the world will be awash

with the greenback, causing the value of the dollar to fall.

Now, it's true that the US is printing a lot of dollars,

but other countries are

also printing their own currencies in similar amounts.

So in theory, it should even out in terms of value.

But the hidden issue is the difference in demand.

Remember, the global financial system is built on the US dollar,

which means even if they don't want them, everybody still needs them.

And if you need something, you don't really have much choice.

And although many countries like China are trying to reduce their reliance on

dollar transactions, this will be a very slow transition.

In the meantime, the risks of a currency

or sovereign debt crisis continue to

rise. For now, countries like China and Japan need dollars to buy

copper from Australia, so the Chinese and the Japanese want dollars, and

Australia is getting paid in dollars.

Europe and Asia currently do a very limited amount of non-dollar

transactions for oil,

so they still need dollars to buy oil from Saudi.

And again, dollars get hoovered up on both sides.

Asia and Europe need dollars to buy soybeans from Brazil.

This pulls in yet more dollars. Everybody needs dollars for trade

invoices, central bank currency reserves-