IN THE three months following the collapse of Lehman Brothers, as the world economy crumbled and investors scrambled for shelter, the dollar rose by 5% against a basket of other widely used currencies. In the past three months it has jumped by 11%; over the past year, by 22%—its fastest ascent in decades. The dollar is not yet in uncharted waters: one euro was worth one dollar in the early 2000s, for example. Its rise will help exporters in less vibrant parts of the world, notably Europe. But moves of this magnitude usually catch someone out, and the likeliest candidates this time are in emerging markets. The principal reasons for the greenback’s rapid strengthening are simple to grasp. With Europe and Japan stuck in the doldrums, and China and other emerging markets slowing, America’s economy looks relatively strong. The IMF expects it to grow by 3.6% this year. The Federal Reserve has already begun to tighten monetary policy, by stopping its programme of asset purchases, and is now preparing the ground to go further. This week the Fed altered the wording it uses to describe its plans (see article), giving itself room to raise interest rates later this year—the first rise since 2006. With American monetary policy tightening, and other central banks still loosening, investors can make higher returns from dollar-denominated assets. In capital floods, and up the dollar goes.

The mechanics of dollar strength may be simple, the effects anything but. American firms that sell abroad are hit: around a quarter of the profits of firms in the S&P 500 are earned in foreign currencies. The greenback’s ascent also mutes inflation, complicating the Fed’s judgment about when to raise rates.

But the chance of a shock is highest outside America. Companies around the world, and especially in emerging markets, have been bingeing on dollar-denominated debt, seduced by the lower interest rates on offer compared with local-currency debt. The stock of dollar debts owed by non-financial borrowers outside America has grown by 50% since the financial crisis, according to the Bank for International Settlements. It now stands at $9 trillion. Emerging markets account for half of that amount, up from a third before the crisis. In China alone, dollar-denominated loans have vaulted from around $200 billion in 2008 to more than $1 trillion now (see article).

As the dollar rises, this debt becomes more expensive to service in local currency. And as the Fed starts to tighten, the interest rates charged on dollar debts—whether in bond markets or via banks—will rise in tandem. As a result, borrowers are at risk of a double whammy: a strengthening dollar and a rising cost of borrowing and refinancing. That does not necessarily portend a wave of bankruptcies. But it does mean another drag on growth at a time when swathes of the emerging world are already struggling. Brazil and Russia are heading for deep recessions; China’s property market, for years the economy’s biggest engine of growth, is slowing. Outside the BRICS, in the last quarter of 2014 emerging markets made their smallest contribution to global growth for more than five years.

Tantrum 2.0

Optimists make several soothing arguments. First, plenty of corporate borrowers have income as well as liabilities in dollars, meaning that currency mismatches are not a concern. But many of the firms that do have matched debts and revenues are oil or mining firms, which have seen their income in dollars plunge because of falling commodity prices. And that still leaves lots of other firms which are exposed to currency moves. A quarter of China’s corporate debts are dollar-denominated; only 9% of companies’ earnings are. That the yuan has barely depreciated against the dollar, and that China shows little inclination to let it do so, is a comfort. But the peg is not guaranteed to hold; if corporate borrowers have not bothered to hedge, they will be hard hit.

The second argument is that, as much as borrowers in emerging markets may come under pressure to service their debts, emerging-market exporters will benefit from a falling currency. Unfortunately, things are not so neat. Although most emerging-market firms that borrow in foreign currency do so in dollars, exporters may trade not with America, but with other countries whose currencies are also depreciating against the dollar. Thus the strengthening dollar can add to emerging economies’ debt burden without helping their exports.

The third source of reassurance is that emerging markets have ample foreign-exchange reserves, which they can use to prop up firms, as Russia and Brazil have done. But countries like South Africa and Turkey have less firepower, and large short-term government debts that will gobble up dollars.

Emerging markets have been put under pressure by the Fed before—most recently in 2013, when the announcement that it would start tapering the pace of its quantitative-easing programme caused money to stampede for safety. If the system could weather that storm, optimists say, it can survive this. But firms have continued to load up on dollar-denominated debt since the “taper tantrum”. And emerging markets are weaker now than they were. The surge of the greenback is one more worry in a world already drowning in them.