The comments below are an edited and abridged synopsis of an article by Alasdair Macleod
The Turkish lira and other emerging market currencies are in trouble because of the withdrawal of dollar liquidity. There are huge quantities of dollars betting against these weak currencies, as well as commodities and gold, on the basis that the long-expected squeeze on dollar liquidity is finally here.
Speculators think that demand for the dollar as the reserve currency is infinite. Foreign financial entities already possess most of the excess liquidity created by monetary expansion of the dollar since the Lehman crisis. Ownership of dollars is unlikely to be evenly distributed across banks representing all foreign nations. This is not to say that dollars are not under-owned by foreign users, and dollars are also available in the foreign exchanges. The reason for the enormous quantity of currency derivatives ($75 trillion in US dollars alone) is that future demand for dollars is already significantly hedged.
Certain emerging market currencies are losing purchasing power because of individual governments and their central banks, which do not seem to realize that their unbacked fiat currencies are valued purely on trust (of their own people and on the foreign exchanges).
China isn’t in trouble from trade tariffs or being undermined by a strong dollar. Geopolitics dominates here. America’s success in attacking the ruble and yuan are temporary victories. China is not being deflected from its strategic goal of becoming, with Russia, the Eurasian super-power, beyond the reach of US hegemony.
This article looks beyond the short-term rush into the dollar, driven predominantly by hot money, to gain a more balanced perspective on the dollar’s future.