"The Fed is breaking things. When you have the dollar spike, expect a tsunami."
https://www.cnbc.com/2022/10/01/the...t-on-edge-as-risks-rise-around-the-world.html
“Strong U.S. dollar strength has historically led to some kind of financial or economic crisis,” Morgan Stanley chief equity strategist Michael Wilson said Monday in a note. Past peaks in the dollar have coincided with the Mexican debt crisis of the early 1990s, the U.S. tech stock bubble of the late 90s, the housing mania that preceded the 2008 financial crisis and the 2012 sovereign debt crisis, according to the investment bank.
The rising correlation among assets in recent weeks reminds Dunn, the ex-risk officer, of the period right before the 2008 financial crisis, when currency bets imploded, he said. “When you have the dollar spike, expect a tsunami. Money floods one area and leaves other assets; there’s a knock-on effect there. The Fed and all the central bank actions are creating the backdrop for a pretty sizable carry unwind right now,” Dunn said.
There are two broad categories of concern right now: Surging volatility in what are supposed to be the safest fixed income instruments in the world could disrupt the financial system’s plumbing, according to Mark Connors, the former Credit Suisse global head of risk advisory.
Since Treasurys are backed by the full faith and credit of the U.S. government and are used as collateral in overnight funding markets, their decline in price and resulting higher yields could gum up the smooth functioning of those markets, he said.
Doing so will likely force the Fed to put a halt to its quantitative tightening program ahead of schedule, just as the Bank of England did, according to Connors. While that would confuse the Fed’s messaging that it’s acting tough on inflation, the central bank will have no choice, he said.
https://www.cnbc.com/2022/10/01/the...t-on-edge-as-risks-rise-around-the-world.html
“Strong U.S. dollar strength has historically led to some kind of financial or economic crisis,” Morgan Stanley chief equity strategist Michael Wilson said Monday in a note. Past peaks in the dollar have coincided with the Mexican debt crisis of the early 1990s, the U.S. tech stock bubble of the late 90s, the housing mania that preceded the 2008 financial crisis and the 2012 sovereign debt crisis, according to the investment bank.
The rising correlation among assets in recent weeks reminds Dunn, the ex-risk officer, of the period right before the 2008 financial crisis, when currency bets imploded, he said. “When you have the dollar spike, expect a tsunami. Money floods one area and leaves other assets; there’s a knock-on effect there. The Fed and all the central bank actions are creating the backdrop for a pretty sizable carry unwind right now,” Dunn said.
There are two broad categories of concern right now: Surging volatility in what are supposed to be the safest fixed income instruments in the world could disrupt the financial system’s plumbing, according to Mark Connors, the former Credit Suisse global head of risk advisory.
Since Treasurys are backed by the full faith and credit of the U.S. government and are used as collateral in overnight funding markets, their decline in price and resulting higher yields could gum up the smooth functioning of those markets, he said.
Doing so will likely force the Fed to put a halt to its quantitative tightening program ahead of schedule, just as the Bank of England did, according to Connors. While that would confuse the Fed’s messaging that it’s acting tough on inflation, the central bank will have no choice, he said.
