The rising expectations of a $1.9 trillion bailout package from the U.S. government to help speed up the U.S. economic recovery is pushing up the dollar’s exchange rate and putting short sellers under pressure to “short” the dollar, which could trigger a domino effect in many markets, causing bubbles to burst in markets ranging from retail investors’ favorable stocks to bitcoin.
Bloomberg reports that Wall Street has been strongly bearish on the dollar since about the middle of last year, but this year, the dollar has become unpredictable. The U.S. continues to administer new vaccines to the public, and the increased likelihood of a new round of U.S. bailouts has raised hopes for faster growth in the U.S. economy, with the dollar index appreciating 1.4% during the period and possibly more against Asian currencies.
The appreciation of the dollar may force investors who are short the dollar to close their positions or sell more risky assets to pay margin calls. In addition to the initial effect, rolling short the dollar could create a powerful feedback loop that would in turn drag down popular trades including emerging markets, commodities, and even tesla stock, as the dollar is the denominating currency for a variety of assets, from emerging bonds to commodities like oil.
The dollar index has always shown a negative correlation with the movement of risk assets. One explanation for the tendency for U.S. stocks to rise when the dollar goes down is that large U.S. companies derive most of their revenue from overseas, and as the dollar strengthens, companies lose money when their foreign earnings are converted to dollars.
But it’s not just U.S. stocks that suffer; other markets around the world are also affected. Such as countries and companies that produce goods. As the dollar strengthens, demand for dollar-denominated oil and copper falls, depressing benchmark prices.
The bubble created in financial markets by unbridled prosperity will burst with just a pinprick, and rolling short the dollar is far more powerful than a pinprick and could ultimately end this wave of post-Epidemic risk asset rallies,” Bloomberg market strategists noted.
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