WHAT YOU NEED TO KNOW ABOUT THE DOLLAR MILKSHAKE THEORY

When the Fed’s policy transitioned from easing to tightening, with interest rates increasing, they’re exchanging a metaphoric syringe for a big straw sucking up liquidity from global markets. As liquidity gets sucked up, the dollar strengthens against other currencies, putting immense pressure on countries with dollar-denominated debt. This creates a dangerous feedback loop. As more capital flocks into U.S. assets, supporting demand for the dollar, debts denominated in dollars globally become more expensive as countries’ local currency loses value against the dollar. As America sucks up financial flows globally, companies and governments outside the U.S. see their credit risks increase due to their diminishing ability to pay down foreign debts denominated in dollars, amplifying investors’ fears and compelling more capital to flee.