If the U.S. allows the dollar to keep rising, it is likely to produce a recession before the economy gets better, according to an analysis by Joseph Calhoun, CEO of Alhambra Investment Partners.
In his view, the great irony of currency wars is that the countries that drive down their currencies are actually waging war on their own citizens.
"They are, quite deliberately, driving capital out of their countries and discouraging investments that will lead to improvements in productivity and long term economic growth,"
Calhoun wrote in a commentary on the Alhambra site.
Calhoun said that much of the negativity about the U.S. economy in the past 10 years has been linked to a weak dollar environment.
"A return to a strong dollar would be very positive for the U.S. economy in the long run but only if U.S. policymakers see it for the positive it really is and resist the urge to join the global currency war. I am far from certain it will be seen that way."
To get to a true strong-dollar economy will involve some short-term pain, Calhoun explained. He said weak-dollar investments would have to be liquidated during the transition, potentially with rising unemployment, crashing commodities and lower production as occurred during a brief 1920-21 U.S. economic meltdown.
"What I'm saying is that if we allow the dollar to keep rising, we are likely to gain a recession in the short term for our efforts. The world has, since 2002, come to expect a weak dollar and investments — massive investments — have been made based on that expectation."
Calhoun said that "malinvestment" is emerging now in the shale industry as oil prices drop due to the stronger dollar.
He pointed to fresh data from the Bureau of International Settlements, which showed that cross border dollar lending tripled to $9 trillion during the past 10 years.
"As the dollar rises, those debts become harder to pay and the global scramble for dollars to pay those debts will only push the dollar higher, a self-perpetuating cycle that will persist until the debts are paid or defaulted upon," Calhoun predicted.
Much could depend soon on the Fed's response to a stronger dollar, and whether the central bank succumbs to popular or political pressure to lessen the short-term economic pain that arises from a stronger dollar.
"If they opt for actions that weaken the dollar, we will get nothing more — and quite possibly a lot less — than the ragged, weak recovery we've seen since the 2008 crisis. If they opt for policies that support the dollar, the recession will be deep but the recovery will be robust and more widespread," Calhoun predicted.
Andy Mukherjee, a columnist for Reuters Breakingviews, stated that the stronger dollar is becoming a "$10 trillion headache for the global economy."
"Borrowers who have loaded up on cheap-dollar debt since the financial crisis could get into serious difficulty — especially if they don't have enough of the United States currency revenue to repay creditors. The threat to financial stability is high," he warned.
"Borrowers could find their debt burden rising in tandem with a strengthening dollar," Mukherjee wrote. "The sharper the rise in the dollar, the bigger the squeeze on borrowers in relatively poorer nations."
© 2025 Newsmax Finance. All rights reserved.