Ambrose Evans Pritchard discusses HERE notes below
The dollar index (DXY) has soared 24pc since July, and 40pc since mid-2011. This is a bigger and steeper rise than the dollar rally in the mid-1990s - also caused by a US recovery at a time of European weakness, and by Fed tightening - which set off the East Asian crisis and Russia's default in 1998.
Contrary to popular belief, the world is today more dollarized than ever before. Foreigners have borrowed $9 trillion in US currency outside American jurisdiction, and therefore without the protection of a lender-of-last-resort able to issue unlimited dollars in extremis. This is up from $2 trillion in 2000.
Emerging market governments learned the bitter lesson of that shock. They no longer borrow in dollars. Companies have more than made up for them.
Mr Jen said Asian and Latin American companies are frantically trying to hedge their dollar debts on the derivatives markets, which drives the dollar even higher and feeds a vicious circle. "This is how avalanches start," he said.
The added twist is that central banks in the developing world have stopped buying foreign bonds, after boosting their reserves from $1 trillion to $11 trillion since 2000. The Institute of International Finance (IIF) calculates that the oil slump has slashed petrodollar flows by $375bn a year. Crude exporters will switch from being net buyers of $123bn of foreign bonds and assets in 2013, to net sellers of $90bn this year. Russia sold $13bn in February alone. China has also changed sides, becoming a seller late last year as capital flight quickened. Liquidation of reserves automatically entails monetary tightening within these countries, unless offsetting action is taken. China still has the latitude to do this. Russia is not so lucky, and nor is Brazil. If they cut rates, they risk a further currency slide.
Powerful undercurrents in the world's financial system are swirling beneath the surface. Some hope that the European Central Bank's €60bn blast of QE each month will keep the asset boom going as the Fed pulls back, but this is a double-edged effect for the world as a whole. It pushes the dollar yet higher. That may matter more in the end.
The most recent Fed minutes cited worries that the flood of capital coming into the US on the back of the stronger dollar is holding down long-term borrowing rates in the US and effectively loosening monetary policy. This makes Fed tightening even more urgent, in their view, implying a "higher path" for coming rate rises.Nobody should count on a Fed reprieve this time. The world must take its punishment.