The strong dollar is expected to remain the norm in 2025. International investors now only bet on the American economy. Consequence: inflows into the American market are reaching record levels, which structurally supports the rise in American stocks and the greenback. For example, during the week of November 5 to 13, US ETFs and mutual funds attracted $56 billion. This is the second largest weekly influx since 2008. It's just incredible.
Historically, the strength of the dollar constitutes a problem for emerging countries, the latter borrowing massively in USD. Fortunately, the situation has changed radically compared to the period 2010-2013. Emerging countries have more solid fundamentals. They managed the Covid crisis better than the G10 countries. Finally, they have an external debt level often below 60% of GDP and do not have a major problem with the sustainability of their debt, with the exception of Ukraine, for obvious reasons.
Take Argentina. A few quarters ago, the country was on the verge of bankruptcy. President Javier Gerardo Milei implemented shock therapy: a 30% reduction in public spending (only universal household allowances were protected), a reduction in the number of civil servants (-75,000 in one year), elimination of more than 50 state agencies, end of budget transfers to the provinces, etc. The first results are encouraging: growth is restarting, the drift in prices has been stopped (inflation divided by ten) and the budget deficit which was around 6% of GDP when he came to power should be absorbed next year. This created some turmoil on the peso, unsurprisingly. But they were quickly contained by the central bank.
Turkey was also in a close situation. The return to budgetary and monetary orthodoxy is bearing fruit: control of inflation, de-dollarization of the financial system, increased liquidity of the capital market, clear improvement in the balance of payments via a drop in imports (surplus of 3 billion dollars), increase in the country's credit rating (B+ by S&P – three notches below l’investment grade) and reduction in the volatility of the local currency exchange rate.
In the past, rising dollar cycles were synonymous with crises in emerging countries. But that was before. There have been no sovereign defaults this year. There certainly won't be any next year. History doesn't always repeat itself.
Perspectives
Euro zone inflation in November is the main statistic of the week. No surprise. Inflation should continue to return to the 2% target, which leaves room for maneuver for the European Central Bank (ECB) to continue its policy of lowering rates. Some analysts expect the rate of decline to accelerate due to possible tariffs from the Trump administration. This is not knowing the ECB well. It should continue the strategy of small steps and opt for a reduction of only 25 basis points in the key rate in December.
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