“Dollar shortage” or trigger financial crisis in emerging markets

Recently, the Federal Reserve Bank of New York, which is responsible for the Fed’s open market operations business, announced that the overnight repurchase program will be extended until at least June 2020, once again triggering global capital market worries about the “US dollar shortage.”

This is the fourth time that the Federal Reserve Bank of New York has announced a renewal of the repurchase business. Since mid-September, the overnight repo rate in the domestic short-term financing market has surged sharply, attracting a large amount of US dollar funds to return to the United States. As more funds are allocated to U.S. Treasury bonds, the global dollar market will face liquidity risk tests in the future.

Why are many professional investors worried about the “dollar shortage”? Because the “US dollar shortage” is often accompanied by the international financial crisis. When the subprime mortgage crisis broke out in 2007 and the European debt crisis broke out in 2011, both were accompanied by a more serious “dollar shortage.” In September, the New York Federal Reserve put a total of nearly 600 billion US dollars (equivalent to more than 4 trillion yuan) into the market, but still failed to alleviate the market’s thirst for funds. Under such circumstances, as the monetary policy of the New York Fed continues to “water”, it has further forced the global dollar assets to accelerate their return to the US domestic market to ease the money shortage.

Faced with the “harvest” trend of the US dollar, the financial risks of emerging economies that have been “pumped” in large numbers continue to intensify. A reasonable and abundant monetary environment is an important guarantee for economic development. The current international trade settlement is based on the US dollar. Therefore, the liquidity of the US dollar is a key driving force for the development of many emerging economies. The Fed’s push for the return of the global dollar to the United States through open market operations is equivalent to passing the crisis of the dollar shortage to other countries. Turkey and Argentina, which are facing economic difficulties recently, bear the brunt of the currency, and their currencies have fallen sharply. Argentina has to implement capital controls.

India, Pakistan, Ukraine and other countries have also been deeply affected. Since August, international investors have sold US $ 5.49 billion and US $ 9.34 billion of assets on the Indian stock and bond markets. The Indian central bank, which has cut interest rates five times, is still struggling to stop the economic downturn.

Why is the “US dollar shortage” hurting so many emerging economies? Take Argentina as an example. Many emerging economies are highly dependent on US dollar investment. They have prematurely liberalized their finances in the development process of their own real economy and built their rapid economic growth on highly liquid international financial capital.

When the dollar supply in the international capital market is sufficient, this model can promote the rapid development of the domestic economy. However, when the strong dollar exchange rate in the international market attracts the return of international capital, it is easy to cause the country ’s financial system to be “large” under the influence of tightening external liquidity. “Drawing blood” triggered a systemic financial crisis. It is against this backdrop that Argentina’s volatile domestic financial situation since August has occurred.

At present, global uncertainties are rising, under the cover of various unfavorable factors such as the possible “hard Brexit” of the United Kingdom, which will lead to the withdrawal of a large number of European institutions from the United States to fill investment losses, and the increase in geopolitical risks leading to the withdrawal of Middle Eastern countries from the United States. The “US dollar shortage” in the fourth quarter was menacing. The financial crisis is essentially a liquidity crisis of the U.S. dollar, caused by a large withdrawal of the U.S. dollar from global markets. In this context, the continuous accumulation of financial risk factors in emerging economies should cause us to be highly vigilant.