Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe wi isn't they Joe? Have you looked at a chart of the dollar recently? It's the only chart I look at. Well, let's but if you were going to choose one desert island chart right now, the dollar is a pretty good candidate. Yeah.
That's why I'm only sort of half joking when I say it's the only chart that I look at because so many, you know, the strong dollar has become the sort of like central market story right now, and then everything else sort of like trades off of is the dollar weak or strong? I think we went a couple of days were like paying attention to the British pound, but now that kind of seems to be over. No, it's really all about It's all about the dollar, and it's come off a little bit from its home, but
it's still very high. Yeah. I was going to say, you know, the last time we had an episode specifically devoted to the dollar, I think was in the summer, and we were kind of joking about top ticking it. Yeah, we didn't. We definitely didn't, because it just kept going and I think it reached, you know, a record high in September, and now, as you mentioned, it's come down a little bit, but still incredibly strong, and it's having a massive impact on not only markets but real economies
around the world. Right, That really is the key thing. And you know, it's a theme that we've talked about for years, even before the pandemic or you know, even during a period when the dollar is kind of weak or much lower than it is. Dollar cycles are really important, both for markets and the real economy. Yeah, and even though people write quite a bit about them, I feel
like they still don't get enough attention paid to them. Weirdly, it's like one of those things that I don't know, people talk a lot about them, but we should definitely talk even more. And when people, or at least you and I, but when people think about these dollar cycles and the fact they have globally, I feel like there's always one name that comes up first. Yes, So on that note, we really do have the perfect guests to
discuss this. Someone who's been on the podcast before talking about what the strong dollar means for the global economy, someone who has done a lot of academic research on this topic, and to this day, whenever you and I write about a strong dollar, we always make sure to reference his previous papers. So I'm very pleased to say we are going to be speaking with Hun Sung Shin.
He is, of course, the economic advisor and head of research at the Bank for International Settlements, and the b i S has just published a bulletin all about the FX market, with a big portion of it devoted to what's going on with the U S currency. So really the perfect person. Let's do it, all right, Huan, Thank you so much for coming back on all thoughts. Thanks Tray,
thanks for inviting me back. So you know, I mentioned in our intro the chart of the dollar looks like if you look at the Bloomberg Dollar Index, for instance, it seems to be at a record. Can you maybe give us some context about what we're seeing with the U S currency? Now? How unusual is this particular moment in history? And you know, Joe mentioned that there have been strong dollar cycles previously. How is this one similar or different? Yeah? Try so that's a great question to
to kick off with. Um, you know, maybe I can go back in time a bit and give you the broad sweep here. I mean, if we look back to the past fifty years or so, maybe even the past forty years, the era of flirting exchange rates. The chart for the dollar looks a bit like a w You know,
we have a peak in the early eighties. In fact, it peaked in January, and then it picked again in the early two thousand's, and I'll give you some numbers shortly, and it's very high currently, So just to give you some some magnitude, I think it's worth having some of these numbers in our minds as we as we talk about this. The BIS publishes a long series on exchange rates. It's the b I S Series on Real Effective Exchange Rates.
So it's a weighted average across all the major bilateral exchange rates with respect to a particular currency, and then we adjust for inflation relative inflation as well. If we go back fifty years and just look at the average of the real effective exchange rate for the dollar, the average is around it's just over a hundred and ten, and in eighty five it reached the hundred and forty five, just hundred and forty five. That gives you a sense of how strong the dollar was back in eighty five.
In two thousand two, it peaked around hundred and twenty four, and currently it's broken through hundred and forty. So we are sort of, you know, we're not quite there in terms of level, but we're you know, reasonably close. And to give you a sense of the of the troughs, there were periods of a weeker dollar as well. The first trough, you know, the first trough in the w as it were, that comes in the early nineties. It reached the low nineties, and then just after the global
financial crisis it again reached the early the low nineties. Then, so there happens some wiggles in the last five or six years. But I think it's you know, useful to have this kind of broad historical sweep as well. There's that famous phrase, and I guess it was former Treasury I just had to google it that former Treasury Secretary John Connelly stated the dollars our currency, but it's your problem,
our currency. Your problem is this phrase that gets repeated a lot, and I feel like when I think about, well, how is it your problem? How is it everyone else's problem? Your work in particular, you know, I always think back to it, but just just start broadly, how would you summarize the strange that it places on the global economy when the dollar moves up this rapidly. What we can do, Joe, is to highlight some of the roles played by the dollar.
I mean, it is the premiere international currency, and it is the premier currency, uh in pretty much all respects. So it is the invoicing currency of choice and international trade. It is therefore the trade financing currency as well, quite naturally, because if you're invoicing in a particular in a particular currency, then the then the trade financing will also be in
that currency as well. But more broadly, it is a currency that figures very highly in reserve holdings, but in particular in capital markets and cross border banking as well. So it's the, if you like, the funding currency for global banking and capital markets. So what that means is that you know, if it's a funding currency, it's the currency that you borrow in. And therefore it's the currency
of leverage to some extent. And so when the dollar becomes strong, if you like, it's the it's the leverage that becomes you more costly. So it's quite natural for you to see the pullback and risk appetite if you like a reduction in risk taking as well. So there's a very strong risk taking element, you know, as the as the dollar strengthens, where you know, there's a kind of you know, pullback from from mistake, and so a stronger dollar has an effect on trade but also on
financial conditions as well, I think. So that's the kind of one sentence, you know summary. Yeah, when we spoke to um John Turik in the summer about this on the show, you know, he kind of described how the dollar works through an economic growth channel given the trade angle, and also a liquidity one because the dollar has this unusual position in the global financial system where it's a
safe haven currency. It's considered that and so when you get worries about economic growth slowing because of the higher dollar, you tend to get more flows into dollar assets, and then the dollar goes up even more, so you get this kind of cycle. I guess, maybe just one more basic question, but why has the dollar been going up? Is it all about interest rate differentials and the fact that the Fed is hiking or are there other factors
to it? And you know, I'm thinking specifically about again one of the dollar are is very specific or unique roles in the world of commodities pricing. I'm certainly the relative pace of managree tightening has certainly played a role, and you know that's something that we describe in the bulletin. If you look at the relative interest rate differentials between the US and other countries, we do see a relationship there.
Where As the interest rate gap widens, we do see a an impact on the bilateral exchange rate, so the the other currency tends to depreciate more. So I think that's a that's a pretty familiar story, and you know that is a large part. But I think there is also a very important real economy effect here as well. If we look at the terms of trade, so roughly, you know, how much has the price of your exports
changed the relative to the price of your imports. A very recent development has been that the US has become a uh net energy exporter, especially in natural gas. So compared to past episodes when a stronger dollar went hand in hand with weaker commodity prices, you know, there is then this this additional effect that comes from the terms of trade as well. So the dollar has moved to some extent in line with other commodity exporters, So that's
the other that's the other factor. And yet a third factor would be what you've already mentioned, Tracy, which is that as uncertainty is increased, the dollar tends to attract your safe haven flows as well. So I think I would say all of those are, to some extent, the consequence of the unusual sequence of shocks we've had. So we had obviously the pandemic, but also the war in Ukraine and the and the subsequent impact of commodity prices as well. And you can certainly put the monetary policy
responses also in this context. So I think we have to, as it were, have a pretty comprehensive you know, I joined that picture of why we are where we are. I want to talk more about the commodity angle, because that seems like what's really distinct and unusual here. And if you, you know, you look at the chart of past dollar spikes that you talked about, those were the era in which, you know, the US was a big oil importer and was not a commodity exporter at all.
This is a new We're not. We're a huge oil producer, as we know, and the whole world is thirsty for our natural gas. We're exporting as much as is physically possible. How does that change things? And I'm also curious does that create a spiral? So I'm thinking about sort of like, you know, the Japanese yen, and for a long time Japan was a big export powerhouse. Now it actually I believe is an importing country, particularly due to energy prices.
We've seen how much the yen has weakened. Generally, does this create like sort of a snowball effect where the terms of trade for a country like Japan deterior It's the end weekend and then energy prices get even more expensive and sort of accelerating the cycle. That is certainly one factor, Joe, and the terms of trade effect also show up in the in the trade figures as well, both for Japan and other other commodity importing areas, and
I'm thinking of Europe in particular. You know, we do see the impact of the energy and food you know, price changes, price increases recently. But I think the important point here is the invoicing currency role of the dollar.
The dollar is the invoicing currency for energy, food, as well as for manufacturing, by the way, but especially for energy and food, because what that means is, if you're in Japan or in the r area, you've seen your currency depreciate against the dollar, and we know that commodity prices have increased even in dollar terms, and so in euro or end terms, it's actually increased a lot more.
And you know, there's a chart in the in the bulletin that shows, you know, just roughly than magnitude, and what that means is the energy and food prices are then incorporated into your inflation figures. And I think the important point to mention here, and you've covered this in your previous podcasts, energy and food prices. They're really salient commodities as far as household behavior is concerned, how shol perceptions are concerned, and so they do figure quite importantly
in how expectations are set. And therefore, you know, how you know, behavior changes as well, and so perhaps even more than other traded goods, if you see this very sharp increase in commodity prices, especially in your own currency, I feel like that would have a disproportionate effect on inflation, you know, domestically and the way that inflation is perceived. What's different this time is that typically you know, historically
we see commodity prices weakening as the dollar strengthens. I mean, there's a very you know well as published relationship, historical relationship where a strong dollar goes hand in hand with
weaker commodity prices. What's different this time is that, you know, given the shocks, given the nature of the shocks, we have this conjunction of a stronger dollar and higher commodity prices due to the war in Ukraine, for example, and that combination, which is a very unusual one, has had an effect in raising the food and energy prices in
other currencies a lot more than it did in the past. Right, So normally you would have this inverse correlation between the dollar and commodities, especially oil, and if the dollar went up, you would expect oil prices to go down. But that's not happening this time around. Can you talk a little bit more about what that means for countries that are importing, you know, a lot of food and energy, because I
think it's pretty important. Yes, it is very important, and clearly it is a negative shock to your terms of trade. It raises the price of food, it raises the price of energy in your domestic currency. And so that will feed into inflation. So it's a bit of a bit of an unpleasant set of shocks there. We see, for example, that the economies that are very geared towards manufacturing have seen a worsening of their trade balance, you know, as
the terms of trade have moved against them. And it's also true that as the exchange rates in these countries have also depreciated relative to the dollar, that's also been an unwelcome factor in raising inflation as well. Because of the very unusual sequence, very unusual combination of shocks, it has been a double valny. Can you talk a little bit more about what it means from a policy perspective?
Four countries that are faced with this unusual series of shocks, So there is high inflation, but much of it in areas that they probably can't control, you know, the global commodities. What does it mean in terms of policy space? That are different countries, haven't you know? We all vols seeing the end charge and it looks like maybe there has been some intervention at some point, but you know, it's
limited and it's sort of ambiguous. But what is it due to policy makers in countries that are faced with this series of shocks. Yeah, I think that's a very good question, Joe, and I suppose the first order of business is to is to address the inflation that is underlying. If you like the it actually sets the terms of
the trade off for all these other policy questions. Even if the source of the inflation is these higher energy and food prices, we know from historical experience, at once that gets entrenched, it will feed into expectations about, you know, how inflation will develop in the future. It's going to get much more difficult to to bring inflation down. And and just to give you a sense of how that process has has progressed, we know and you've been covering
this in your podcast a lot. In the early days of the shock, uh, you know, just off you know, just as we were talking about supply chains, it seemed that the price increases were limited to you know, certain good sectors. Some of the work of the b I S we we also follow that pretty closely. But what we've seen is that there's been a broadening out of inflation over the subsequent months. We've seen the core inflation
measure also move up. And this is global energy as well, and this is global so this is a phenomenon that we're seeing in every country, which is not just high inflation now just headline inflation, but this broadening effect of across goods and services. Yeah, exactly, and we see it in core inflation. And this is true outside the US as well. So irrespective of the source of the shock, you know, once inflation it gets entrenched, we know there's
going to be very difficult to bring it down. So addressing inflation would be certainly, you know, the first order of business. But as you're doing that, I think there are other things one can do to mitigate some of the effects of a stronger dollar, especially if it affects your financial markets. So we know, as we you know, spoke just earlier, one of the very you know, well established effects of a stronger dollar is that it tightens
financial conditions. You know, it is the global funding currency, it's the currency that you borrow, and therefore it's the currency of leverage. So stronger dollar tends to go hand in hand with the leveraging if you like, a recoiling from risk taking, and that manifests itself in you know, not only hanking sector flows bank lending, but also in
capital markets. You see for example, spreads on corporate bonds go up as a dollar strengthens, And there's a chart in the bulletin, but I think illustrates that quite quite strikingly. And we also have very good evidence that it affects the shadow price of intermediary balance sheet if you like. So you know when you when you speak to Salt and Posts or or Perry Merlin, you know they I think have a very similar sort of approach to the US.
There is a there is a sort of marginal cost of balance sheet we tend to observe, for example, through the deviation from covered interest parity. The ffect spaces spread, for example, is that that spread goes up when the daughter is stronger, which is a kind of tell tale
sign that pattern shoot is becoming more expensive. And so for all these reasons, if the tightening of financial conditions gets excessive, and you know, it might sort of trigger episodes of stress, and then of course there are ways of mitigating that kind of stress. I think central banks
have and how the tools to do that. You can mitigate that partly by in a supplying liquidity in a very sort of strategic way, but also effects intervention to as we'll lean against the wind is another way to address partly this kind of you know, you know, the tightening of financial conditions as well. This is what I
wanted to ask you about. Like we used to worry about competitive devaluation in years since two thousand eight, But should we be worried about competitive I guess it interventions now people trying to strengthen their currency against the dollar. And how sustainable are those types of moves? You know, I can see some parts of the argument, but why a strongervelop might lead to you know, high interest rates and other jurisdictions you know, higher than pactic could be
you know, in the absence of a stronger dollar. But I'm not sure that that the argument sort of fully comes around to a conclusion that you know, this leads
to kind of competitive strengthening. So one part that certainly does you know, make some sense is the idea that you know, as the dollar strengthens, it raises the local currency price of food and energy, and that certainly has an effect on domestic inflation for the reasons that we discussed, so that has to be met by a monetary policy response domestically, So there would be a tightening there, but
for a kind of feedback loop to be established. You you need some some kind of way of completing that circle. And I think that additional step for us it is not as clear. If anything, you would imagine that, you know, the quartation goes the other way. So as the global economy weakens, you might you know, see the fair sort of moderating, you know, if if there is a demand spill over. But clearly this is something that you know,
we need to keep an eye on. It's certainly a departure from the usual story about competitive devaluations, you know, currency wars in the traditional sense. But I think the
the you know, the effects are pretty multifaceted here. And if we just look at some of the more recent events and in capital markets that you mentioned that the dollar has sort of slightly topped out now in the last few days, but more generally, if we look at the monetary policy responses around the world, I would say that, you know, there are sort of signs that this kind of reverse currency wars scenario probably isn't you know, as strong as you know, we might have fooled and so yeah,
so I would accept some parts of that, but probably wouldn't embrace it. Holy So you mentioned you know, you referenced our conversation recently with Resulting and Period that was about the future of the dollar. But I actually want to sort of look backwards for a second, because you know, as you talk about, as we've been discussing, the dollar is the invoice and currency, It's the funding curacy currency,
it's the everything currency, it's the borrowing currency. When you look back, either it's sort of real activity or um borrowing and hard currency for other countries. Over the last few years, has there been any change to the trajectory of the importance of the dollar or has it been sort of just going from strength to strength in terms of its role in the world economic Well, Joe, I think I can sort of give you some hard numbers here because as well as the bulletin, we we have
just come out with the BIS triannual survey. Every three years we do a pretty you know, thorough stoptake of what's going on in the effects market particular, but also in the interest ructor of this market. But let's focus on the effects market. So we do a pretty you know, detailed stock take. We gather data from all our part per central banks, but we have a pretty good take and We've just come out with the latest Triangle survey and the answer is not much has changed. If anything,
the role of the dollar has has strengthened somewhat. So just to give you some some broad numbers here, the headline number is that of all effex transactions have the dollar on one side, So you know, it's a it's a pretty big number. And that was the same in our last Triangle survey back in and the other currencies, I mean they pretty much were trading water in that respect, the Euro, the n seventeen, the pound, sterling, so that's you know, pretty much you know what they were last
time around. The remin b has gone. It went up from four percent in UH in twenty nine to seven percent this year, so there's a sort of a marginal take up in the m MB, but on the scale of things still seems you know, this is uh you know,
it's pretty small. And you know, for those listeners who say, well, how come these numbers add up to more than a hundred, We'll remember we are talking about a currency being on one side of a transaction, right, so you know, in theory, if you add it all up, it'll add up to two. That's a useful footnote, that is a useful This will help us with Twitter people. I realized that because absolutely it took me. I realized then halfway through. But at first I was like, wait a second eight plus thirteen
plus seven, and it took me. But then I got absolutely, but that's useful for no. Yeah, and Joe, maybe you know, just to finish the thought, so, why might it be the case that you know, there is this very if you're like resilient role for the dollars, the premier international currency, what if you think about how the pieces fit together? And I think we talked about this in one of our previous conversations. All the pieces support the other pieces,
So you know, think about starting from invoicing. So if you're in the voice in the dollar, then it makes sense to finance trade financing, you know, in dollars, because
you're going to be receiving you dollar cash flows. And similarly, if you're going to make an investment and the cash flows in dollars, then of course it makes sense to borrow in dollars because you know, you want to eliminate at least one of the you know, the the uncertainties between your obligations and income in cash, so you tend to borrow in dollars even if you're not located in
the United States. And if that's the case, then the capital markets, you know, will have a preponderance of dollar instruments, and which is you know, you know exactly what we see. So the capital market development will very much follow in the wake of these currency decisions. You know, asset managers pretty much will have a preponderance of dollar securities, you know,
dollar assets more generally. And you know, if you're a pension fund or a life insurance company from a non dollar jurisdiction, you know, you're limited in your domestic currency instruments, and so in your portfolio there's going to be a
very large chunk of you know, dollar denominated assets. And so if that's the case, then you have to find a way of hedging the currency risk, because your obligations to your beneficiaries, your obligations to your policy holders are going to be in your domestic currency rather than in dollars. And so there's a there's a role for dollar hedging.
There's a hedging for the dollar risk, which means that you know, you would take up you know, swaps with the global banks and the global banks are if you like, lending you dollars short term, and of course they would need to source those dollars in global capital markets, and so the the global banking system, the global capital markets.
There's a very good reason why that's a very heavy dollar ecosystem, because it builds on all these previous steps, and so as you know, one layer is supported by the layer beneath, the whole thing sort of you know, hangs together. It's going to be, you know, very difficult to see how that kind of arrangement would would change.
Perhaps over the very very long run, you know, we would see its possibly some changes at the margin, but it's going to be something which you know has inherent I feel like resilience because of this mutually reinforcing layer, the layers of the global financial system. You know, you mentioned the impact of a stronger dollar on global financial conditions historically, given its centrality in global trade, and I
wanted to ask you. In the bulletin, there's a line that says, more generally, it's unclear whether the impacts of things in the dollar exchange rate on global financial conditions is now stronger or weaker than in the past. Can you explain that a little more like what potentially has changed here. So what we were thinking of in that passage is that, you know, we have to distinguish between the aggregate impact given the size of the rise in
the dollar index, versus the point for point impact. So you know, as one point goes up in the broad dollar index, how does that affect financial conditions? So clearly, given the very large moves, we have seen quite substantial impact across the board. But what we had in mind in that paragraph was really about the you know, the point by point impact, and there I think we do
see some interesting things this time around. So, you know, on the one hand, it's certainly the case that emerging markets are much more resilient or seems to be much more resilient this time around. And if anything, it's it's advanced economies that have really been perhaps more affected by
tightening global financial conditions. So one one way to think about the emerging market story here is, first of all, if we look at the changes in the bilateral exchange rate, it is very telling, for example, that the Brazilian real and the Mexican paco have actually appreciated relative to the dollar this year, and that's really how to turn up
for the books. You know, when you typically think back to two recent periods of dollar strength, in particular that period in the in the middle of the sixteen that was an episode when a strong dollar hit the emerging markets particularly hard and also actually commodities. You know, that was a period when when all reached very very low levels. So the emerging markets are actually doing reasonably well this time around. And we also see it in the spreads
of domestic currency sovereign bonds issued by emerging markets. I mean, there's a chart in the in the bulletin at you know, it's been a quite a striking way that when you look at advanced the economy corporate bonds, or indeed the dollar denominated bonds of of emerging markets, we have the usual story where a stronger dollar has gone hand in hand with higher bond spreads. But the one exception is
the local currency emerging market sovereign bonds. I mean, they're the spread had actually come in, and so that's another sense in which emerging markets have actually done pretty well. And I think part of this story is the fact that the emerging markets started to you know tighten earlier.
You know, they anticipated what was coming down the road. Um, you know, Brazil started to tighten quite early last year and you know, quite quite far as well, say with Mexico, although to a lesser extent an emerging markets have actually you know, learned a lesson. I think one of the good stories to come out of this current episode is the emerging markets have been a bright spot relative to you know, all the other difficulties that the globally economy
is facing. Just looking at the in the bulletin and I'm looking at the third chart, in particular the changes in terms of trades since January twenty two, and I mean part of the story is just that Europe, the euro Area and Japan are extremely dependent on foreign sources of energy, particularly guess and of course we all know the story with the pipelines into Europe and Japan's lack
of domestic energy production. How much when we look at that other chart showing in particular the extremely strong performance of the Brazilian rail is it a sort of simple terms of trade story. I think the terms of trade definitely have a role to play, but it's also I think the monetary policy story as well, So you know, I should certainly have mentioned in terms of trade effect
for Brazil as well. I mean, there's a scattered chart in the bulletin that shows that you know, those you know, those countries that tighten more relative to the US, you know, those are the ones that have actually maintained the currency values. There are lots of other effects going on, So this is by no means a clean relationship. But yeah, I see like Canada is relatively better and also one of the sort of of the you know, of the sort of dirtier shirts, one of the countries that it looks
like it's tighten more than some of the others. Yeah, and of course Canada is a very large oil produced as well. So this is the big question, and I feel like I've asked it a couple of times this year, But is there a point at which a strong dollar becomes problematic for the U S economy itself? Despite you know, the uniqueness of the role of the U. S currency in the global financial system and despite the energy independence which Joe was just talking about. That's a great question, Tracy.
You know that that definitely are consequences. I think these two is how much of the impact of the dollar globally will then spill back to the US. And and here I think the demand channel certainly will be one if you have a week of global economy that's certainly not not good news for the US economy either. And this is why actually the reverse currency war stories you know, needs to be you know, somewhat modified, because but that sort of feedback loop to hold, there has to be
something that completes the circle. And it's perhaps not as you know obvious, you know, as it could be there now in spite of everything, though, I mean, I would just go back to what I was saying earlier on on some of the policy implications. You know, I think the first order of business has to be inflation, because you know that from that we know that once inflation gets entrenched, you know that that will be much more
difficult to dislodge. But it does mean that, you know, as we tackle inflation globally, there are some of these collateral effects that will definitely in a way on US as demand slows, as in particular in those countries with very high dead levels, in particular very high household debt levels, as rates go up, you know that will actually have pre you rapidly you know, cooling effect on demand as well, and also perhaps financial stability issues that are coming up.
So if you think about those kinds of I feel like financial stability challenges, financial stability if like trip wires that might be lurking, I think we just have to be much more vigilant about seeing where the fault lines might be lurking and address them in a way that the policy framework as a whole is going to give us something you know, fairly coherent. So you know, it would not be a good idea if you're tightening with one hand but then loosening with the other, you're going
to be, you know, intervening in markets. It had better be you know, fairly well focused, with a very you know,
tightly defined rationale for why you're doing it. I think it's especially important in in the current period because, as we discussed earlier, the rest taking channel me means that the global funding currency roll of the dollar means that you know, there are constraints that are kicking in earlier, and you know they may interact in very complex ways, and so there are trip wires strewn all over the place that we need to be tiptoeing around very carefully
as well. So so even as we were addressing inflation, you know, that's job number one. We have to keep a very close eye on what else might go wrong. I suppose, you know, we we now have a lot of experience after the GFC on how to address you know, specific market stresses, and I think it is fair to say these are primarily about capital markets and non bank
financial intermediaries rather than the banking sector. You know, we can be happy that at least the banking sector looks a lot stronger than before the GFC, but still the capital markets and non bank financial intermediaries, these nb f I s in the jargon, they have have channels of transmission that we're not always familiar with. I think the recent experience in the UK is a very good example
of that. So while we are actually addressing with inflation and the conducting monetary policy in the best way, and that's you know, taking into account the spillbacks as well as spillovers, we have to be extremely vigilant on what else is going on because there are trip wires, you know, strewn on the floor, as it were, and they are those types of things that can be easily missed. Who
have to be vigilant. I have one more question, which is what could actually break the dollar doom loop that we've sort of been describing, because you know, in normal times, I think one of the accepted ways that dollar strength would kind of peter out would be the rest of the world starts exporting more goods to the US to take advantage of, you know, the stronger currency, and eventually that kind of hits US domestic growth and that would
cause the dollar to weaken. But as you well know, we aren't in normal times, and you know, Europe is disrupted by energy shortages, and China is still disrupted by COVID lockdowns and things like that. So there seems to be a big question mark over whether or not the normal economic patterns would apply well. Tracy, I think, you know, even in normal times, a story that a depreciation would actually stimulate exports and therefore that's going to be pulling
the economy to stronger activity. I think even in normal times that mechanism you know, wasn't wasn't quite right. We know that the influence of dollar invoicing also extends to the impact on trade balances as well. If your price is sticky in dollar terms, your export price has done it just very much, but the dollar invoice goods domestically, you know, will rise in domestic currency terms, and so
that has a immediate effect on consumption. So typically what we see is that a stronger dollar goes hand in hand with both weaker exports and the weaker imports. Weaker imports much more strongly felt. And in addition, there are these you know, financial channels that that operate what would
break the current episode. I think, you know, if we can get inflation under control, and if we can see inflation you know, visibly coming under control, we see a path back to target that's going to undoubtedly influence the thinking behind monetary policy actions around the world. And for
the reasons that we discussed. You know, the monetary policy actions in one country will definitely affect those in other countries, and to the extent that the exchange rates will also move as the path of monetary policy, you know, adjust way into the future. That's going to affect exchange rates
in particular, but as a prices more generally. I'm less pessimistic than than some other commentators that you know you've had on your podcast in that you know, on once we get inflation under control, you know, that's the key if you like. So, if you think that we've been in some kind the you know, vicious spiral, getting inflation under control will allow us to convert that vicious spiral
into virtuous spiral. And you know, this could happen much more quickly than than you know, many of us, you know, could imagine. So you know, as you know, Joe, I mean, things move very very quickly in financial markets, and so I think, you know, once we see that, once we see the light at the end of the tunnel, that's going to change the general complexion of the discussion. I would say, I like that optimistic end. Yeah, there's a chance that maybe it's the head wind turns into a
tail wind. All right, Well, we could easily talk to you, you know, for another hour on this, but thank you so much for coming back on the show. And you know, if you're a listener who is interested in this, please check out the bulletin from the b I S and some of Juan's previous academic work as well. Thanks Tracy, Thanks Joe, thank you so much. Always great conversation. Yeah, great, thanks, thanks you and really appreciate it. So, Joe, I thought it was great to get that kind of historical and
nuanced perspective on this issue. Because it is true with currencies, it tends to bring out a lot of emotions and strong opinions on either side. I would say there's so much good. I mean, first of all, it is interesting and novel, this idea of a dollar up cycle in a commodity up cycle at the same time. So to start like, that's just a really interesting phenomenon that's going
on that makes this moment different than the other. I also, obviously I liked when Hughan sort of talked about I guess maybe you'd call it the interlocking puzzle pieces or
the layers of dollar dominant. You start with invoicing, that leads to hedging, that leads to you know, you invest in dollars you need to, you know, borrowing dollars, you know, to avoid f X risk, and then that leads into the question of, well, if there are different components of dollar positioning, you get in the situation in which the financial trip lawyers break before the real economy cools down. Yeah.
I thought that was a really important point. And also, you know, we kind of touched on this with John Turk as well. But the idea that when we talk about something breaking in the market. You know, the idea of the FED hiking until something breaks has become something
of a trope or a meme at the moment. But it's really like something that would cause something in the US to break, because to some extent we've already seen things internationally start to break down, like, for instance, the b o J having to intervene in the end and things like that, the Bank of England UM and the situation in the UK. So the thing that we're kind of looking for is the trip wire that ends up
impacting the US directly. You know. I also think just and again listeners should go check out the new B I S bulletin out today. But this idea of like, it's unusual that it's the e M countries the currencies, and not just the currencies, because I kind of knew that on the currency front, but the spreads on domestic bonds also being staying pretty tame and not blowing out the same way that we're seeing and say the UK
or Germany and elsewhere. I think that's also an interesting phenomenon, And of course there are multiple drivers of that, both the terms of trade and the fact that many of these countries actually got a jump start on the hiking, so very interesting dimensions to this dollar rally. Absolutely all right on that note, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Halloway. You can follow me
on Twitter at Tracy Halloway, and I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart. Please follow our guest Hunsong Shin. He's at hun Soong Shin. Follow our producers Kermen Rodriguez at Kermen Armin and Dashel Bennett at Dashbot. And check out all of our podcasts at Bloomberg under the handle at podcasts. And be sure to check out the Bloomberg odd Logs newsletter. Go to Bloomberg
dot com slash odd Lodge. It's a blog that Tracy and I have right there pretty regularly, post trade in scripts, and once a week we also do a newsletter on the various topics that we talk about. I'm here and anything else that's on our mind. Thanks for listening.