Loading ...The Dollar Index gained 1.6% this week, almost all of the gain following Wednesday morning’s disappointing CPI report. The dollar ended the week at a five-month high. Bloomberg: “Dollar Caps Best Run in 18 Months on Fed Rethink, Haven Bid.” The yen dropped another 1.1% to a new 34-year low.
Beijing has been forced into a hard currency peg to avoid the slightest indication of losing control. The certainty afforded by pegs is accommodative to speculative flows and levered speculation. But pegs under pressure demand tough decisions. The hope is always that some moral suasion (intervention threats) and financial resources (international reserves) buy time for a return to relative stability. It’s a gamble where the stakes compound over time.
Forces can materialize that thwart any return to stability – such as U.S. inflationary pressures, a Fed forced into “higher for longer,” spacious interest-rate differentials, and a dollar melt-up.