The dollar index, which measures the US dollar's strength against a basket of six other major currencies, will keep rising before Coronavirus is in check. The shock due to Coronavirus precipitates a sharp fall of the US equities. This will trigger the firesales of international assets by, among others, leveraged US investors in US equity markets.
The global financial markets come under a deleveraging cycle. As the US and international investors and lenders cut back their investments in US dollar-denominated assets abroad, the borrowers in Europe and Japan will have to buy back the US dollar, the funding currency. In particular, those banks borrowing short and lending long in the US dollar will have to borrow the US dollar cash, widening the deviations from covered interest rate parity against the US dollar.
The strengthening of the US dollar will increase the current account deficits of the United States. Thus, the Triffin dilemma obtains. The United States issuing the global reserve currency should be willing to supply the world with an additional supply of the US dollar to fulfill global demand for the funding currency, thus resulting in a current account deficit.
The global financial markets come under a deleveraging cycle. As the US and international investors and lenders cut back their investments in US dollar-denominated assets abroad, the borrowers in Europe and Japan will have to buy back the US dollar, the funding currency. In particular, those banks borrowing short and lending long in the US dollar will have to borrow the US dollar cash, widening the deviations from covered interest rate parity against the US dollar.
The strengthening of the US dollar will increase the current account deficits of the United States. Thus, the Triffin dilemma obtains. The United States issuing the global reserve currency should be willing to supply the world with an additional supply of the US dollar to fulfill global demand for the funding currency, thus resulting in a current account deficit.
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