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Dollar on a rampage

Matein Khalid

King Dollar is now on a rampage that will redefine global capital flows and have a seismic impact on the economies, financial markets and even politics of Europe, Asia and EM, which should now invite Britain to join their club since sterling is a mere 1.25 and Bo Jo antiques would make him an ideal third world tinpot dictator though bring your own booze to the party LOL.

The US Dollar Index, dominated by its 57% Euro weight, was 89 a year ago and is now a stratospheric 103. Since a parabolic rise in the USD has been correlated with severe slumps in the UAE property market cycle (as in 1981 to 1985 under Reagan, 1996 to 1999 under Clinton, 2007 to 2008 under Dubya and 2014 to 2020 under Obama/Trump).

I tremble at the prospect that history will repeat itself next year since at least a dozen close friends planned to develop luxury villas in New Dubai. The milieu feels like a bubble peak, exactly like the Expo hype in the summer of 2014 when the US dollar began its ominous ascent and property prices in Dubai went on to slump by 50%. King Dollar can cast a deflation chill in the Gulf with the vengeance due to the logic of GCC currency pegs.

There is a safe haven bid in the US dollar as not even Macron’s win over Madame Le Pen, the Gallic Blondie was sufficient to prevent the Euro from slumping down to 1.05. The Kremlin’s nuclear blackmail threats and decision to weaponize Gazprom’s exports to Poland/Bulgaria have made the USD a safe haven magnet on a scale not seen since the nadir in US-Soviet relations in the pre-Gorbachev era of the Cold War.

The strength of the Reagan Superdollar led to the LatAm debt crisis, $6 oil, a collapse in the commodities, global recession and finally forced the US Treasury to engineer the Plaza/Louvre Accords, which meant a major USD devaluation that cost the Gulf at least 500 billion in lost petrodollar revenues even before Uncle Sugar presented his Bill for Desert Storm that ejected Saddam’s armies from Kuwait.

It sends a shiver up my spine to see the Euro at a five year low even as Germany’s Wehrmacht (oops, we call it Bundeswehr now. Achtung baby!) sends tanks to Ukraine for the first time since Operation Barbarossa in June 1941. It is significant that the market weighted Dixie (aka DXY) is now trading at its highest level since the Covid pandemic first shut down the world in March 2020.

Energy security in Europe is now the catalyst for global financial angst since Russia will do its best to punish Germany for its 100 billion Euro rearmament budget and military aid to Ukraine. A spike in US Treasury bond yields amid a hawkish Powell Fed was a license to print money by going long dollar yen, which has now tanked to 128. Yet the fall in the 10 year note yield has convinced me to close this trade after an obscene 12 point profit. I think the Japanese yen now underperforms the Euro though I am nervous about a Ukraine cease fire or a sudden coup against Putin with too big a Euro short below 1.04

Matein Khalid is strategic advisor, Asas Capital

Also published on Medium.

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