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 The dollar's 7-percent surge was its biggest quarterly rise since
the same period in 2008, when the collapse of Lehman Brothers
triggered the global financial crisis and a worldwide rush into the
U.S. currency.
The swing of such a magnitude in the world's reserve currency, which
is used to price almost everything in global commerce from Apple
shares to zinc, permeated all financial markets. It lifted
volatility, and crushed the value of commodities and emerging market
currencies in the process.
The biggest gainer from 22 assets and market instruments tracked by
Reuters was China-listed A-shares, which rose 16.1 percent, and the
biggest loser was Brent crude oil futures, which fell almost 14
percent. More than half of the 22 fell.
Much of what the fourth quarter holds will hinge on how much faith
investors retain in their collective belief that the U.S. economy
will outperform its peers, the Federal Reserve will soon raise
interest rates, and the dollar will strengthen further.
Contrast that to the euro zone, where deflation fears grew in the
third quarter, the European Central Bank eased historically loose
policy even further and, remarkably, 10-year German government bond
yields fell below 1 percent.
"The dollar move is not going to hurt the U.S. economy in any
appreciable way, certainly not at this point," Deutsche Bank chief
U.S. economist, Joe LaVorgna, said, noting that the United States is
producing much more of its own energy and so slashing its import
bill and trade deficit.
"This is all good. The Fed has been perpetually disappointed by the
evolution of the economy, but monetary policy has to be
forward-looking," he said.
Investors buying the dollar against a basket of six major currencies
on July 1 would be 7.4 percent better off today and almost 8 percent
in the black if they had bought the dollar against the Japanese yen.
The dollar also rose against the euro, which buckled under the
weight of grim views on euro zone growth and inflation.
Throw in the a late flurry of jitters around the Scottish
independence referendum this month, and implied volatility in major
exchange rates hit their highest levels this year. In the case of
short-dated pricing, especially in sterling, it was the most
volatile period in years.
Morgan Stanley, global head of currency strategy, Hans Redekerat,
expects this to remain a feature of the coming months as the dollar
rises further and exchange rates provide the shock absorber to
shifting global economic plates.
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"Economic decoupling never takes place, so in an environment of
non-synchronized global growth the exchange rate always comes back
under the spotlight," he said.
"Two thirds of global funding costs is determined by U.S. dollar
funding rates. Volatility is going to stay with us and is going to
normalize," he said.
European assets suffered across the board. The euro fell to a
two-year low against the dollar, euro zone stocks lost almost 10
percent and peripheral sovereign bonds slipped.
The exception, of course, were German bonds. The surge in demand for
the safest of all euro zone bonds pushed the 10-year yield below 1
percent, and 2-year yields turned negative. A stronger dollar and
rising volatility bodes ill for emerging markets, as investors
become less inclined to take risks and more inclined to put their
cash in relatively safe and attractive developed markets, notably
the United States.
Emerging market local currency bonds fell about 5 percent in the
third quarter and most emerging currencies suffered. Brazil's real
fell to a 6-year low on Monday, posting a fall of about 10 percent
on the month.
Similarly, high-yield bonds, which had seen unparalleled inflows in
the first half of the year, also started to feel the pinch. They
fell more than 3 percent in the third quarter.
But some analysts point out that the spike in volatility and the
dollar later in the quarter followed the slump in volatility across
many equity, bond and currency markets earlier in the period to lows
not seen for years, if ever.
"Seen through the lens of history and economics, the recent dollar
move is small," according to Goldman Sachs.
(Editing by Louise Ireland)
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