Using the Fed’s broad real trade-weighted dollar index (my favorite FX metric, much better than DXY), the dollar hit an all-time high in March 1985 (128.4) and hit an all-time low in July 2011 (80.3). Right now, the index is 95.2, slightly below the middle of the 35-year range. But what matters most to trading partners and international debtors is not the level but the trend.

The dollar is up 12.5% in the past four years on the Fed’s index, and that’s bad news for emerging-markets debtors who borrowed in dollars and now have to dig into dwindling foreign exchange reserves to pay back debts that are much more onerous because of the dollar’s strength. Actually, the Fed’s broad index understates the problem because it includes the Chinese yuan, where the dollar has been stable, and the euro, where the dollar has weakened until very recently.

When the focus is put on specific emerging-markets, EM, currencies, the dollar’s appreciation in some cases is 100% or more. Much of this dollar appreciation has been driven by the U.S. Federal Reserve’s policy of raising interest rates and tightening monetary conditions with balance sheet reductions.

Meanwhile, Europe and Japan have continued easy-money policies while the U.K., Australia and others have remained neutral. The U.S. looks like the most desirable destination for hot money right now because of interest rate differentials. This article describes the problem and has some recommendations for faster growth among U.S. trading partners. But that advice is likely to be too little, too late.

A new EM debt crisis has already started, as described in the previous article. The only issue now is whether the new crisis will be contained to Argentina and Venezuela or whether contagion will take over and ignite a global financial crisis worse than 2008.

This new crisis could take a year to spread, so it’s not too late for investors to take precautions, but the time to start is now.

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