US dollar's woe could be a boon for emerging markets

AS A global reserve currency, the greenback is heavily relied on by market participants to conduct business transactions, international financing, and as a store of value. More than half of cross-border loans and international debt securities issued are denominated in US dollars. In contrast, the US economy now makes up less than a quarter of the global economy. Despite its diminished status in economic importance, the US dollar continues to maintain a central role in the global financial system.

The reason for a weakening US dollar is obvious to most observers. There is essentially a demand/supply problem. With trillions of dollars fiscally printed via massive debt issuance, and another few trillions monetarily printed by the Federal Reserve to mark up banking reserves, there is now an oversupply of US dollars versus what is demanded globally. The US has printed money on a scale unmatched by any country in the world. This is expected to continue as US grapples with the coronavirus.

Here's some context: On a trade-weighted basis, the US dollar appreciated more than 40 per cent from its bottom during the Great Financial Crisis, to its most recent peak in March this year. In a matter of four months, it is down more than 6 per cent on a trade-weighted basis, or 10 per cent, if one looks at the euro-biased Dollar Index.