'Getting the dollar wrong is deadly': A rapid rise in the dollar could cause a domino effect across emerging markets

Christian Charisius/Reuters

• The US dollar has already been rallying this year, which puts emerging markets with dollar-denominated debt in a hard position.
• A currency crisis in Turkey could lead to a "rapid appreciation," analysts warn.
• Follow the dollar in real time here.

A rallying US dollar has been clobbering emerging market currencies this year, and analysts warn it could soon appreciate further and faster.

"The dollar right now is a flat-track bully, really," Deutsche Bank macro strategist Alan Ruskin said Wednesday on CNBC. "It's just knocking over every weak currency it can find."

The greenback is up more than 5.5% this year on the Dollar Index, which measures the currency against a basket of peers. And an unwinding currency crisis in Turkey, which has trimmed more than a fifth of the lira's value in the past week, could accelerate its climb.

If Turkey were to introduce capital controls and repudiate some of its foreign debt, Macquarie strategists Viktor Shvets and Perry Yeung said the dollar could see a rapid appreciation.

"We are concerned that declining liquidity, attempts to raise rates & China's hesitancy is a recipe for stronger US$," they wrote in a note. "Turkey might tip it over."

Any sharp rise in the dollar's value could raise risks for emerging markets even further as it puts those with large amounts of dollar-denominated debt, including Turkey, in difficult positions. Some currencies that have already been affected by contagion fears include the South African rand and the Indian rupee, which hit an all-time low Tuesday.

"Currencies are far too complex to forecast," they wrote. "But getting the dollar wrong is deadly."

Issuing a reserve currency comes with downsides. According to the Triffin dilemma, a theory named after a Belgian economist, a country has to run increasing deficits or find other ways to achieve sufficient liquidity. That can create a balancing act between short-term domestic objectives and a global agenda.

"It is not only a problem for issuing country but it is also a major headache for the rest of the world," Shvets and Yeung said.

But William Jackson, chief emerging markets economist at Capital Economics, doesn't think "significant" capital controls are likely to happen in Turkey.

"The economy is heavily dependent on foreign funding and the imposition of some controls might raise fears about the next steps, leading to a slowdown in foreign inflows," Jackson said.