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How Will the Next Credit Crunch Affect the US Dollar?
The combination of US dollar appreciation and more loans in US dollars may spell trouble for emerging markets and then for the global economy. A huge part of the recent financial crisis and Great Recession was a significant tightening of credit. Today, as emerging markets falter and their currencies weaken, lenders are insisting on denominating their loans in US dollars. This spells trouble for anyone who is making their money in a weakening currency. Paying back the loan will become more and more expensive and defaults are likely. The strengthening dollar is part of the reason for this problem, but how will the next credit crunch affect the US dollar?
The US Is Not Isolated from the Global Economy
As much as the current crop of US isolationists might like to think the US can go it alone, that is not true. The USA is plugged into the global economy. The trade relationships of the USA with others may change a bit depending on how the trade wars work out. We recently looked at how a stronger US dollar affects the trade war.
The dollar is going up due to the trade war. Viewed from the opposite direction, how does a stronger dollar affect the trade war? A stronger dollar and weaker yuan will make Chinese imports more attractive to US consumers, even with high tariffs. It would seem that the more the US wins and the dollar goes up, the more it loses as the yuan and other currencies become cheaper making foreign products more competitive in US markets.