Don't Let the Bowl Break
A crisis erupts. Stock markets fall. Gold and the dollar rise. By now everyone knows this market reflex by heart. No matter how accustomed we become, a crisis still triggers panic and selling begins. Those holding stocks—especially in risky markets—tend to sell first. As sales accelerate, stock markets in those regions decline. The second wave follows quickly. The proceeds from these sales are converted into dollars and transferred out of the country. As demand for dollars rises, the USD/local currency exchange rate increases. Even citizens who do not normally invest in the stock market start converting their savings into dollars or buying gold when they see the dollar climb. This, in turn, pushes exchange rates and gold prices even higher. One might assume that if a crisis originates in the United States—or if the US itself is the source of the crisis—the dollar would weaken. Yet the opposite often happens. Foreign investors who hold assets in emerging markets typically convert th...
