Currency Turmoil in an Unbalanced World Economy

Like all asset prices, exchange rates are moved by a momentum created by alternating long phases of overvaluation and undervaluation with no stabilization at their equilibrium value. The dollar is particularly prone to these large fluctuations that regularly distort real exchange rates between major currencies. Misalignment in exchange rates is a repeated feature of dollar cycles, as much as unsustainable imbalances in the current accounts.Moreover, the appreciation phase of the dollar that has begun for several months is particularly disturbing for emerging countries that are heavily indebted in dollars. This paper studies the consequences of dollar appreciation on the world economy. The prospect of a new dollar cycle is worrisome since most countries, far from deleveraging after the financial crisis, have massively increased their debt relative to GDP.