Episode Details

Our experts discuss U.S. dollar strength and its far-reaching impact on the global economy and the world’s stock markets.

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research.

James Lord: I'm James Lord, Head of FX Strategy for Emerging Markets.

David Adams: And I'm Dave Adams, Head of G10 FX Strategy.

Michael Zezas: And on this episode of Thoughts on the Market, we'll discuss one of the most debated topics in world markets right now, the strength of the US dollar.

It's Wednesday, May 1st, at 3 pm in London.

Michael Zezas: Currencies around the world are falling as a strong US dollar continues its reign. This is an unusual situation. So much so that the finance ministers of Japan, South Korea, and the United States released a joint statement last month to address the effects being felt in Asia. The US dollar's dominance can have vast implications for the global economy and the world stock markets.

So, I wanted to sit down with my colleagues, James and David, who are Morgan Stanley's currency strategy experts for emerging markets and developed markets. James, just how dominant is the US dollar right now and what's driving the strength?

James Lord: So, we should distinguish between the role the US dollar plays as the world's dominant reserve currency and its value, which can go up and down for other reasons.

Right now, the dollar remains just as dominant in the international monetary system as it has been over the past several decades, whilst it also happens to be very strong in terms of its value, as you mentioned. That strength in its value is really being driven by the continued outperformance of the US economy and the ongoing rise in US interest rates, while growth in the rest of the world is more subdued.

The dollar's international role remains dominant simply because no other economy or market can match the depth of the US capital markets and the liquidity that it provides, both as a means of raising capital, but also as a store of value for investment; while also offering the strong protection of property rights, strong sovereign credit ratings, the rule of law, and an open capital account. There simply isn't another market that can challenge the US in that respect.

Michael Zezas: And can you talk a bit more specifically about the various ways in which the dollar impacts the global economy?

James Lord: So, one of the strongest impacts is through the price of the dollar, and the price of dollar debt, which have an impact beyond the borders of the US economy. Because the majority of foreign currency denominated debt that corporates outside of the US issue is denominated in US dollars, the interest rate that's set by the US Federal Reserve has a big impact on the cost of borrowing. It's also the same for many emerging market sovereigns that also issue heavily in US dollars. The US dollar is also used heavily in international trade, cross border lending, because the majority of international trade is denominated in US dollars. So, when US interest rates rise, it also tightens monetary conditions for the rest of the world. That is why the US Federal Reserve is often referred to as the world's central bank, even though Fed only sets policy with respect to the US economy.

And the US dollar strengthens, as it has been over the past 10 years, it also makes it more challenging for countries that borrow in dollars to repay that debt, unless they have enough dollar assets.

Again, that's another tightening of financial conditions for the rest of the world. I think it was a US Treasury Secretary from several decades ago who said that the US dollar is our currency, but your problem. And that neatly