As US dollar hitting record highs, it is no longer a sign of global recovery but also becoming the world’s premier fear gauge and global risk.
Recently, US dollar hit its 13-year high. According to the ICE Dollar Index, which measures the currency against a basket of six other currencies, soared to 100.6, its peak since April 2003. In view of analysts, US dollar is fueled by rising government bond yields (and the Fed’s anticipated rate hike), and expectations of Trump’s fiscal expansion (infrastructure stimulus).
Furthermore, as the dust is settling after the Trump triumph, the magnitude of the win – which ensures a Trump White House, a Republican Senate and a Republican House – translates to the kind of political consolidation that America has not witnessed in generations.
If Republicans find unity and Democrats remain fragmented, Trump could have a major opportunity to promote policies that would further stimulate the US economy, growth and the dollar.
However, the future path of the US dollar may not prove as rosy as anticipated.
Forces driving US dollar risks
Recently, the Bank for International Settlements (BIS) – a sort of a think-tank of central banks – released an intriguing report, which argues that the US dollar has replaced the volatility index as the “new fear index.â€
The mantle of the barometer of risk appetite and leverage used to belong to the VIX (or the Chicago Board Options Exchange volatility index). Before the 2008-9 financial crisis, there was a close correlation between leverage and the index. When the VIX was low, the appetite for borrowing went up, and vice versa. As a result, the VIX soared to its record 80.9 some eight years ago.
After years of ultra-low interest rates and now negative levels, and multiple rounds of quantitative easing that remain in effect in Europe and Japan, one would expect the VIX be elevated. And yet, it has averaged 16 in the ongoing year. Monetary easing by the world’s leading central banks in advanced economies have suppressed volatility for stocks, while compressing credit spreads.
