CEPR Discussion Paper – The Global Dollar Cycle

Maurice Obstfeld and Haonan Zhou

February 2023


The U.S. dollar’s nominal effective exchange rate closely tracks global financial conditions, which
themselves show a cyclical pattern. Over that cycle, world asset prices, leverage, and capital flows
move in concert with global growth, especially influencing the fortunes of emerging and developing
economies (EMDEs). This paper documents that dollar appreciation shocks predict economic
downturns in EMDEs and highlights policies countries could implement to dampen the effects of
dollar fluctuations. Dollar appreciation shocks themselves are highly correlated not just with tighter
U.S. monetary policies, but also with measures of U.S. domestic and international dollar funding
stress that themselves reflect global investors’ risk appetite. After the initial market panic and
upward dollar spike at the start of the COVID-19 pandemic, the dollar fell as global financial
conditions eased; but the higher inflation that followed has induced central banks everywhere to
tighten monetary policies more recently. The dollar has strengthened considerably since mid-2021
and a contractionary phase of the global financial cycle is now under way. Owing to increases in
public- and business-sector debts during the pandemic, a strong dollar, higher interest rates, and
slower economic growth will be challenging for EMDEs

Link: The global dollar cycle