Smith views the widening gap between a strong dollar and weak yuan as an alarming trend gaining little coverage, as the media is distracted by president Trump’s “madcap populist bluster” turned policy.
Markets have similarly been ignorant of the clear and present danger of Trump’s views on trade, “inventing a narrative ever more irrational” and “expecting the mathematically unachievable while discounting very real worries,” said Smith.
Historically, stronger American currency tends to be a “poor omen for global risk assets,” because it creates liquidity issues with far-reaching implications, he explained.
Dollar strength, he said, “tends to draw capital back to the US creating a shortage of liquidity in the most fundamental financial instrument that exists – the dollar itself – which still lies at the core of the global banking, oil and trade system, as well as financial exchange.
“The result of the shortage of dollar liquidity is that real interest rates for ‘eurodollars’ (the generic name for dollars traded outside the US), have been rising sharply creating significant stresses, particularly across Asia.”
