[Strong Dollar] Soaring Dollar Value... Warning of an Unprecedented 'Vicious Cycle of Ruin' Approaching

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] As the value of the US dollar soars to its highest level in decades, warnings are pouring in that the so-called ‘Dollar Doom Loop’ may be starting. The strength of the dollar, the global reserve currency, is delivering a direct blow to financial markets and the real economy worldwide, which in turn leads to a flight to safety in the form of the dollar.

According to the Wall Street Journal (WSJ) on the 17th (local time), the Dollar Index, which measures the value of the dollar against the currencies of six major countries, surged to 108 on the 15th, marking the highest level in about 20 years since October 2002. The Bloomberg Dollar Index, which analyzes the dollar’s value against the currencies of the Group of 20 (G20), also hit an all-time high of 1304.55 on the 14th.

Meanwhile, the value of major currencies plummeted. The Japanese yen fell to its lowest level against the dollar in 24 years, and the euro slipped below parity with the dollar, trading under ‘1 euro = 1 dollar’.

John Turek, founder of JST Advisors, pointed out, "An unprecedented dollar doom loop may be starting," adding, "It is uncertain whether the Federal Reserve (Fed), which is raising interest rates at the fastest pace in decades, can break this cycle." He explained that the strong dollar would worsen economic cycles in various countries, especially in manufacturing, leading to a vicious cycle of reduced global trade → economic slowdown concerns → stronger dollar as a safe haven.

Furthermore, the strong dollar could prompt other countries to tighten monetary policies to stabilize foreign exchange and financial markets, potentially causing real investment shocks. Emerging markets with high foreign debt ratios and global companies face increased repayment burdens, which could also lead to crises. A representative example is the 1980s, when a strong dollar persisted amid high interest rates, causing Latin American countries to fall into a series of defaults.

Already, central banks in countries such as Switzerland appear to be entering a so-called ‘reverse currency war’ by raising benchmark interest rates to boost their own currencies’ values. Bloomberg News reported, "The fact that major central banks are either in tightening mode or about to enter it is making the current situation even more complicated." The Wall Street Journal (WSJ) reported, "Few expect the dollar to change course anytime soon. The dollar’s strength is likely to continue for the time being," adding, "The strong dollar will be a double-edged sword for US consumers and businesses alike."