Readings: Dollar strength, Bad Medicine, Hedge fund losses

Brad Setser, CFR:  The worse the US does, the better the dollar does … The dollar hasn’t fallen along with the US stocks, US Treasury yields or US employment. There is now a broad consensus that the US is currently in a recession , something that might be expected to lead to a fall in the dollar. A recent research piece from Sophia Drossos and Yilin Nie of Morgan Stanley argues that global deleveraging is a major current source of support for the dollar. Drossos and Nie note that US banks have grown reluctant to lend to banks abroad — and many banks abroad have significant holdings of dollar debt and thus need dollar financing. . . . the US became the new Japan after the Fed’s rate cuts — despite a large current account deficit. And the US dollar has started to act like a “funding� currency in times of stress. And in general, when risk aversion goes up and risky bets are pulled, funding currencies rally … Washington Post:  Bad Medicine ...