An upside-down world of "reverse currency wars" is seeping into the real one.
Devotees of Netflix hit "Stranger Things" know well how mayhem and monsters from the show's foreboding parallel universe seep into regular daily life, with devastating effect.
Something similar appears to be happening to one of the dominant economic policy tropes of the past decade.
Financial firms, such as Goldman Sachs, have for months warned that long-fought "currency wars" — where countries struggle to prevent a weakening U.S. dollar and overvalued domestic currencies from crimping exports — could be inverted, with scary consequences.
Dubbing this twilight policy zone "reverse currency wars," they reckon the re-emergence of inflation, a hawkish Fed and dollar strength would force governments and central banks to rethink exchange rate orientation and race to keep pace.
In the decade after the U.S. Federal Reserve first embarked on bond-buying quantitative easing to ward off deflation, many countries complained the resulting dollar weakness would hurt their trade in a low-growth world and force them to overheat by trying to match the Fed's easy money.
But all that changed after this year's aggressive Fed turn toward reining in 40-year-high inflation with sharply higher interest rates, a halt to new asset purchases and planned rundown of its bloated balance sheet of more than $8 trillion.
The upshot has been a rocketing dollar that's seen its index against other major currencies soar almost 20% over the past year. That leaves U.S. trading partners with the opposite problem of trying to support currencies for fear their weakness would make dollar-priced energy and food imports even costlier, aggravating sky-high inflation everywhere.
Citi strategist Ebrahim Rahbari reckons this all points to "overtightening" around the world — a prospect that's "deeply disturbing" for global markets, with lower equities, flatter bond yield curves and a severe squeeze on financial conditions.
"Reverse currency wars are strongly bearish for risk assets," he said, adding that currencies of the more dovish central banks and fragile economies are most vulnerable.
If such a crunch hastens a global downturn, there may well be great pressure on the Fed to back off. But war-driven energy problems, tight post-pandemic labor markets and political pressures ahead of U.S. mid-term congressional elections in November argue against any let up this year.
The upside-down world looks here to stay.
Dolan is editor-at-large for finance and markets at Reuters.