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does not imply that there will be a demise of the dollar, or that fewer people in the world would speak English in protest. If anything, I'm worried that a sharp rally in the dollar could trigger another financial crisis in EM... Don't get me wrong, I do not believe the dominance of the dollar is good for the global financial/monetary system. But it is a trend that is difficult to reverse, unless the structural integrity of the EUR is enhanced, and the foundations of the RMB market are improved. Increasing returns to scale have made English/dollar popular, and it will be increasingly difficult to challenge their roles as the world internationalizes. (5) The BIS recently published an interesting and important paper (‘The Dollar, Bank Leverage and the Deviation from Covered Interest Parity,’ by H.S. Shin et al., BIS WP 592) on how a stronger dollar could lead to a tightening in lending conditions in the rest of the world, including EM. ‘[T]he value of the dollar plays the role of a barometer of risk-taking capacity in capital markets. In particular, it is the spot exchange rate of the dollar which plays a crucial role… [T]he strength of the dollar is a key determinant of bank leverage… Our results point to the financial channel of exchange rates, through which fluctuations in the strength of the dollar set in motion changes in capital market intermediation spreads that respond at a high frequency… [I]t is when the domestic currency appreciates, financial conditions in that country loosen, and CIP deviations narrow… [A] strengthening of US dollar has adverse impacts on bank balance sheets, which, in turn, reduces banks’ risk bearing capacity.’ The findings of this paper are consistent with two of the points made above, that we may re-enter a phase that is not that positive for EM currencies and that the dominance of the dollar as an international currency is having unintended consequences for the rest of the world, out of line with the local fundamentals.

Trump and Europe. Political and social pressures have returned to Europe, and could continue to accentuate the centrifugal forces in the region. There are many risk events on the horizon, including the Austrian Presidential election on December 4 (the worry here is a victory for Mr Norbert Hofer of the far right party), the Italian referendum on Constitutional reform on December 4 (while a ‘no’ outcome is largely priced-in, an actual ‘no’ outcome may trigger a series of events in Italy that might pose some downside risks to Italian banks and in turn other European banks), the Dutch parliamentary election on March 15, 2017 (the worry here is further advances by the far right party led by Geert Wilders), the first round of the French presidential election on April 23 and the second round on May 7, UK local elections on May 4 (this will be the first major electoral test for PM May), and finally German regional elections on May 7 and 14 and the parliamentary election in September. (1) I don’t think the direction of causality runs from Trump to Europe, but that the underlying forces propelling both Brexit and Trump are the same forces that are pushing the political centre of mass to the right in Europe. This direction of causality is

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