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Surging Dollar Will Continue to Rattle Some Emerging Markets

Surging Dollar Will Continue to Rattle Some Emerging Markets
(Dreamstime/Sergey Khakimullin)

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Thursday, 07 June 2018 09:04 AM Current | Bio | Archive

Emerging Markets

Next week we will have a Federal Open Market Committee (FOMC) meeting. It is expected that the Federal Reserve will raise interest rates. There has been some talk as of late if the Fed should seriously take into account emerging market developments.

A July 2015 World Economic Forum paper made reference to the then Fed Chair Ben Bernanke who had illustrated that the sensitivity of emerging market countries to global financial developments — such as developed-country policy changes — differs depending on the policy choices of the emerging country (including structural and regulatory reform and the flexibility of exchange rates), which is still the case today.

The Fed’s approach to reducing the size of its balance sheet “in a gradual and predictable manner” was communicated in September 2014 — emerging market policymakers were given plenty of notice to prepare for the normalization of U.S. monetary policy.

The dollar run is not over yet and therefore there is more turmoil to come in many, but not all, emerging economies.

G7 Meeting

The G7 leaders’ meeting in Quebec, Canada is due to start tomorrow. The G7 is now frequently called the “G6 plus one” where the one stands for the United States because of the recent U.S. trade tariffs policies.

The big concern is that the summit will be dominated by continued high trade tensions that we now have seen for quite some time between the U.S. and the 6 other major Western industrialized economies of the G7 countries. Such tension exists with many other countries that will not be present in Canada, like China . A G20 meeting wouldhave been a better choice for tackling the trade issues.

German Chancellor Angela Merkel said: “It turns out that we already have a serious problem here with multilateral agreements” on U.S. action of imposing punitive tariffs upon aluminum and steel products, adding that it is important that Europeans act together and stand for fair and free trade and turn against protectionism.

France has joined Germany in warning President Donald Trump that it won’t sign a joint statement of the summit in Quebec without major concessions from the U.S.

The European Union (EU) has identified products it intends to slap a 25 percent consumer tax (tariff) on top of. The products are of course all partially made in the U.S. This was to be expected.

However, a statement signed by the G6 without the U.S. might emphasize the trend towards U.S. isolationism and that is something financial markets should be rightly worry about.

In this context, and according to JPMorgan Chase & Co.’s Marko Kolanovic, the on-again, off-again war over international commerce has pushed the market value of the S&P 500 stocks down by a stunning $1.25 trillion since the beginning of March.

In a note to clients Kolanovic said: “Trade tensions continue to inflict damage to investor psychology and business confidence. A negotiation strategy that includes bluffing/threats can be successful in a two-party negotiation setup but is more likely to deliver self-defeating results in a complex system such as global trade.”

European Central Bank (ECB) Monetary Policy Change

In the ever-entertaining internal discussions of the European Central Bank (ECB) and after having revived growth in the Euro area with an unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase program, the ECB has been debating whether to end the purchases this year as the threat of deflation has passed and the bloc is on its best growth run in a decade.

Yesterday, we got several comments from ECB speakers, and their basic message was that at their next meeting on June 15, the ECB is going to talk about ending its bond buying program that they really should have ended already. Many think that this program will indeed come to an end by the end of the year and that the volatility of the Italian financial markets last week, is not enough of a threat, at least for now, to the financial system to prevent that from happening.

In this context, for “euro” investors it might be interesting to take note of what the President of the German Bundesbank Jens Weidmann said this week in Brussels: “The currency union is not yet crisis proof in a durable way. The financial market turbulence in Italy over the past week illustrates that.”

In the meantime, the euro has strengthened somewhat against all major currencies while the dollar index (DXY) is down by about 1 percent.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The dollar run is not over yet and therefore there is more turmoil to come in many, but not all, emerging economies.
emerging, markets, trump, trade, investors
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2018-04-07
Thursday, 07 June 2018 09:04 AM
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