Emerging market risk is on the rise and the dollar has undergone huge fluctuations. Let’s tie this back to the origin and understand why dollar is our currency but your problem.
President Nixon’s Treasury Secretary, John Connally, famously told famously told a group of European finance ministers worried about the export of American inflation that the “dollar is our currency, but your problem.”
On August 15, 1971, in what’s known as Nixon Shock, president Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.
Stagflation
The immediate result was a prolonged period of “stagflation” defined as rising inflation accompanied by recession.
Nixon Shock unleashed enormous speculation against the dollar. It forced Japan’s central bank to intervene significantly in the foreign exchange market to prevent the yen from increasing in value. Still, this large-scale intervention by Japan’s central bank could not prevent the depreciation of US dollar against the yen.