Yet it is easy to forget how bearish sentiment on the dollar was in 2008. Many expected it to fall in the teeth of a crisis that had, after all, originated in America. Instead it spiked as banks outside America scrambled to get hold of greenbacks in order to roll over the short-term dollar borrowings that funded their holdings of mortgage securities. In 2015-16 China ran down its reserves by $1trn in part to meet demand for dollars from Chinese companies who had borrowed heavily offshore. And notwithstanding attempts by countries, such as Russia, to de-dollarise their economies, the greenback is as central to the world economy as it ever was. If there are hidden strains in cross-border finance, they will eventually be revealed by spikes in the dollar.
It would be foolish to rule this out. No doubt pockets of stress will emerge in the coming weeks—a hedge fund, say, that has borrowed dollars to buy riskier sorts of assets and faces a cash crunch. But the sort of aggressive borrow-short-to-lend-long bets that intensified the 2007-09 crisis have been much harder to make. Banks have tighter constraints on their lending. Panic by overborrowed foreigners does not seem a first-order concern.
Other plausible, but voluntary, changes in behaviour would affect the dollar in a variety of ways, or not at all. Foreign investors might simply choose to sell (or refrain from buying) American securities amid the current turmoil—a sort of financial self-quarantine. But surplus savings must be put to work somewhere. Asian funds have been steady buyers of overseas debt securities. Japan’s Government Pension Investment Fund, a $1.6trn pool of retirement savings, had signalled that it will increase its holdings of foreign debt and equities in the coming financial year. There is no sign that it is backing away from this, says Mansoor Mohi-uddin, of NatWest Markets in Singapore. Indeed there is a logic to its front-loading foreign-asset purchases, as a means of weakening the yen and helping Japan’s exporters.
Japanese funds have in recent years preferred to buy euro-denominated debt, because the costs of hedging euro currency risk is low. But if the Fed keeps cutting rates, dollar hedges will become cheaper. Currency-hedged Asian investors might then tilt towards American assets. That would be neutral for the dollar (because of the hedging) but a welcome fillip for issuers of corporate debt in America.