Strong dollar and high oil prices risk triggering liquidity crisis

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Strong dollar and high oil prices risk triggering liquidity crisis

Published: 19 Mar. 2026, 00:05

Audio report: written by reporters, read by AI

Kim Sung-jae

The author is a business administration professor at Furman University and author of “The Story of Tariffs” (2025).

The won-dollar exchange rate rose sharply from 675 won per dollar in 1981 to 896 won in 1985. The surge in the dollar was not unique to Korea. The dollar index, which measures the greenback against six major currencies, jumped 88 percent from 85 in 1981 to 160 in 1985.

In an aerial view, gas and diesel prices are displayed at a Love's Travel Stop on March 17, in Kermit, Texas. Diesel prices have surged past $5 per gallon as attacks on energy infrastructure and fuel exports intensify amid the ongoing conflict involving Iran, Israeli forces, and the United States. [AFP/YONHAP]

The roots trace back to the 1970s. Two oil shocks drove up global inflation and pushed economies into stagnation. In the early 1980s, the Federal Reserve raised its benchmark interest rate to as high as 21 percent in an aggressive bid to tame double-digit inflation.

Long-term U.S. Treasury yields remained above 10 percent and the U.S. economy rebounded strongly, reinforcing dollar strength. As the strong dollar swelled the U.S. trade deficit, President Ronald Reagan directed efforts to weaken the currency.

In September 1985, finance ministers from five major economies met at New York’s Plaza Hotel and agreed to coordinated dollar depreciation, known as the Plaza Accord. The dollar index fell to 88 by March 1988, while the won strengthened to 669 per dollar the following year.

In 2000, amid the dot-com bubble and inflation concerns, the Federal Reserve raised rates to 6.5 percent, again lifting the dollar. The following year’s September 11 attacks pushed the dollar index to 120 as investors sought safe assets.

Until then, dollar strength itself did not directly threaten the global economy. European and Asian economies benefited from increased exports to the United States, and oil prices remained relatively stable during periods of dollar appreciation.

The turning point came in 2008. The U.S.-originated global financial crisis sent the dollar index down to a record low of 72. At the same time, international oil prices surged. U.S. West Texas Intermediate crude reached a record $147 per barrel that year.

Rising demand driven by China’s growth met constrained supply amid political instability in oil-producing countries. A global financial stress indicator, calculated by multiplying oil prices and the dollar index, exceeded 10,000 for the first time.

History repeated itself in the spring of 2022. As the Federal Reserve launched aggressive tightening, the dollar index rose above 100, while oil prices exceeded $120 per barrel following Russia’s invasion of Ukraine. The stress indicator again crossed 10,000 and stock markets plunged.

Recently, U.S. airstrikes on Iran have pushed oil prices above $100 per barrel, while the dollar index hovers around 100. With global financial stress rising rapidly, the risk of a liquidity crunch is increasing.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.