Why a Strong Dollar Causes Most of the World Major Pain

Tracy Alloway (0:13)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:18)

And I'm Joe Weisenthal.

Tracy Alloway (0:21)

Joe, do you remember you wrote something, I'm guessing it was a year or two ago, but you basically wrote about how finance was sort of ground zero for de-globalization and a trade war. Do you remember that?

Joe Weisenthal (0:37)

I don't remember the specific thing, per se, that you're talking about, but I feel like this has been a reoccurring theme for us and a couple of things I've written and you've written for a while now, thinking about just this idea that if the world is going to de-globalize, and arguably it is, and arguably President Trump, that's part of his mission, that finance might be really where you see it emerge first.

Tracy Alloway (1:06)

Right, because I think what tends to happen when people talk about trade tensions or a trade war is people start thinking about tangible goods, like semiconductors and chips and, I don't know, all sorts of commodities, but people rarely actually stop and think that, well, all that global trade is something that is being financed by someone, and the financiers in this case are financial institutions or large banks, and so it would make a lot of sense if they also get hit by the trade tensions.

Joe Weisenthal (1:39)

Absolutely, and if you look at the history of finance, and I remember this was something we talked about years ago on the podcast. I think we were talking to Emmanuel Dermen. If you look at the history of finance, so much of it corresponds to globalization and even the explosion of derivatives and other measures designed to hedge risk.

A lot of it is designed to sort of mitigate the risk of trading across two different countries with different currencies and so forth. So you really you can't talk about globalization without talking about all these instruments that have been built up by Wall Street banks.

Tracy Alloway (2:19)

Very true. And you mentioned currencies just then. And the interesting thing is that even though we're talking about global trade and cross-border financial transactions, of course, the vast majority of these are still denominated in the US dollar. So you have this weird sort of space where things are happening between countries, between all these different entities, companies and banks.

But many of the transactions are dollar denominated. And of course, what we've seen recently has been about of US dollar strength. And the speculation has been that that has added to the pain of the trade war, at least up until recently.

Joe Weisenthal (3:01)

Yeah, there's a lot of different sub stories going on right now with the trade war with actions taken by the Trump administration.

One of them that hasn't got a ton of attention is whether any of this is going to eventually contribute to the undollarization of the global economy. Because people have been predicting that for a long time, that maybe somehow global, different trading partners might find an opportunity to come off the dollar. But nothing really has even come close to emerging that would actually replace the dollar. The euro has flaws, the Chinese yuan, for obvious reasons, is not in a position to really replace it. But with the various actions that the Trump administration has taken, obviously people wondering if there will be a renewed effort on part of various actors to get out of the dollar system, so to speak.

Tracy Alloway (3:53)

Right, and even if there isn't a push to replace the dollar in some way, you can imagine that there will be renewed focus on the potential for a currency war, right? Devaluations to sort of increase your competitiveness when it comes to trade. So that seems to be the minimum. Anyway, the reason this intro is slightly disjointed is because we have a guest on today who not only can talk about everything from trade to cross-border flows to currency regimes, but pretty much anything else, cryptocurrency, financial stability, big tech, credit markets overheating, you name it. He can talk about it.

Joe Weisenthal (4:33)

Yeah, exactly. So we have this really unwieldy intro touching on all these things because our guest is so unusual and unique in his ability to pull together and cover all these different strands of what's going on in world financial markets and the economy.

Tracy Alloway (4:52)

Exactly, we're going to see if we can narrow it down a bit. But without further ado, our guest for today is Hyun Song Shin. He is economic advisor and head of research for the Bank for International Settlements.

And if you haven't been following his research already, I highly encourage you to do so. Hyun, it's so nice to have you on the show.