Market news | 26 July, 2018

The effects of a strong dollar on the economy

Alberto Villasán Investment and Markets Director

The strength of dollar vs all other currencies…

During May and June we have seen a major appreciation in the USD, US Dollar,  in relation to the rest of the global currencies, especially with respect to certain emerging countries’ currencies, such as the Argentine peso and the Turkish lira.

One reason for the dollar’s strength lies in the rise of US interest rates, with investors turning to short-term assets in USD (such as treasury bills) as they offer a better return than in the past, with very little risk.

…which could transfer to the real economy…

The fact that the dollar’s appreciation has been generalised may lead to a deterioration in other countries’ economies, given that international investors “withdraw” their investments in those projects or economies that they consider the weakest, seeking a solid return on their dollar-denominated assets.

That is one of the reasons why we have seen a greater weakness in assets related with certain developing economies, such as Brazil or Turkey.

For as long as the USD continues to rise, since it is closely tied, as we have said, to US interest rate rises, we may continue to see weakness in these countries or assets.

…and the rest of the financial markets.

The effect of this draining of liquidity could impact in the medium term on financial markets in certain countries, especially those which have high levels of debt in USD. In this sense, the countries most affected would be, in descending order, Turkey, Hungary, Argentina, Poland and Chile.

As a result, we do not rule out fresh episodes of weakness in the financial assets of these countries.