Mike Dolan

LONDON, (Reuters) – A rising U.S. Dollar is a clear sign that the global economy will be experiencing a slowdown over the remaining 2021.

New strains of COVID and severe labour supply bottlenecks have disrupted the momentum of the recovery from the pandemic.

In August, global economic data surprised all and continues to disappoint forecasts. Some banks have cut their growth forecasts.

HSBC has downgraded its global GDP forecasts, predicting a nearly halving of growth by 2023, despite the modest results so far.

In aggregate, bond borrowing rates are now at historic highs. This has recovered about half the decline from pre-shock levels. The world stock market has recorded its first negative quarter in three years since COVID’s first impact.

But, the dollar continues to gain across all currencies, rising almost 5% since June against major global currencies, hitting its highest levels in 2021 against the euro and sterling.

Dollar surges can be both a reflection and an amplifier of financial stress. They also have the tendency of snowballing.

This was contrary to consensus polling, which began at the beginning of the year and continued until the end. The median forecasts for steady weakness persist until August according to Consensus Polling.

Analysts who are convinced global credit growth, liquidity and asset prices drive all asset prices — notably Citi’s Matt King or CrossBorder Capital of Michael Howell – have raised alarms since summer.

Global liquidity has declined and stocks markets have retreated as many central banks pull back from crisis pandemic situations and China slows its credit impulse.

King reiterated this week in King’s note that Quantitative Equity continues to decline and private credit growth has faltered. He also stated, “low real yields” are the last thing that is helping markets.

True, real, inflation-adjusted yields now seem to be waking up as markets plot not only a horizon for bond purchases reductions but also for interest rate increases.

TRICKY ADJUSTMENTS

The dollar is impacted by the fact that U.S. real interest rate increases have outstripped other rates since September’s Fed meeting, which was conservative and kept longer-term inflation expectations from under wraps.

CrossBorder Capital added the dollar boost to the mix.

It stated that ebbing liquidity growth has already slowed the world, and that any sharper squeeze caused by nerves over monthly inflation prints could cause instability and lead to another recession.

This episode “has all the ringings of major policy errors,” the statement said. It added that the recent gains in dollar and flattening U.S. Treasury’s 5-10 Year yield curve in inflation protected securities was a good guide to monetary conditions. Markets are pricing in gradual tightening. Market moves could become even more volatile if central bankers get too aggressive.

China’s slowdown and policy focus to stability over growth are just two other dimensions.

CrossBorder stated that the West is now facing two difficult adjustments simultaneously: The end of QE as well as the end to the Chinese credit boom. Global Liquidity appears set for a tumble.

The Fed is preparing to begin the tapering of its bond purchasing spree. This could be due to a combination rising U.S. Real Rate Premia as well as a preference for cash in dollars during a stressful financial environment.

Rising real rates combined with a rising dollar are toxic to non-U.S.-based borrowers. These debts include large chunks that were accrued after the pandemic, and will be repayable over the next two-years.

This negative feedback loop creates its own stress.

Studies have highlighted the rise in dollar borrowing by other banks last year, following a temporary credit crunch. The total dollar credit given to these entities by Bank for International Settlements had already exceeded $12 trillion in the middle of 2020, more than 14% more than the global GDP.

The Institute for International Finance pointed out, perhaps in a troubling sign, that half a trillion dollars (or more than $4 trillion) of loans and bonds from emerging markets due next year are denominated dollars.

If stress is a factor in stress being created, then policymakers might consider the role of the dollar. They remained silent on the issue during two meetings of G4 central banksers and G7 finance mins, which showed that it is still very low up their priority list.

It is possible that a turbulent fourth quarter will change all of this.

(By Mike Dolan. Twitter (NYSE::): @reutersMikeD. Editing by Alexander Smith