A weakening dollar reduces the credit risk for dollar-borrowers, which encourages more dollar-denominated lending. This credit is the lifeblood of intricate global supply chains. As a result, exports of sophisticated goods, like semiconductors, can thrive even during periods of dollar weakness.
Despite recent concerns about private credit quality, the most rapid and substantial growth in debt since the GFC has occurred in the government sector. This makes the government bond market, not private credit, the most likely source of a future systemic crisis, especially in a rising rate environment.
The dollar's decline, particularly in April, was not driven by investors divesting from US assets. Instead, it was caused by investors with large, unhedged dollar exposures belatedly adding hedges. This involves selling dollars in the spot or forward markets, creating downward pressure without actual asset sales.
Gold's price is rising alongside risk assets and falling during stress events, a reversal of its historical role. This behavior mirrors speculative assets like Bitcoin, suggesting its recent rally is driven by momentum and bandwagon effects, not a fundamental flight from fiat currency debasement.
Unlike debt defaults that can trigger systemic financial crises, a stock market collapse primarily impacts the real economy. It reduces household wealth, which in turn curtails consumer spending. While painful, this wealth effect is a different and less systemically dangerous channel than a widespread credit event.
While FX swaps protect against currency fluctuations, they are short-term instruments. Investors holding long-term assets must continuously roll them over, exposing themselves to liquidity squeezes and rollover risk. This effectively swaps one type of risk (currency) for another less obvious one (maturity).
Investors have been holding unhedged US dollar assets to capture both high yields and currency appreciation, a speculative strategy traditionally used for emerging market local currency bonds. This parallel indicates a shift in risk perception, where US assets are no longer seen as a pure safe haven.