Strong USD Spells Trouble for Borrowers in Emerging Markets

USDollar, cc Flickr frankieleon, modified, https://creativecommons.org/licenses/by/2.0/

Summary

The COVID-19 pandemic is the quintessential ‘black swan’ event that threatens to upend global markets: it causes sweeping demand- and supply-side disruptions and, critically, there’s no way to know how long they will last and hence how harmful they will ultimately be when all is said and done. This pervasive uncertainty has led to a wave of deleveraging across the world where investors dump their equities and bonds for the relative safety of cash – US cash to be more precise.

One byproduct of this trend has been a rapid strengthening of the US dollar, and that’s very bad news for certain vulnerable companies and sovereigns which, having already borrowed heavily in the currency, will now face the combined headwinds of a stronger greenback and economic fallout from COVID-19 back home when these debts mature.

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