Tags: Evans-Pritchard | Fed | dollar | world

Evans-Pritchard: Fed Rate Hike Might Cause Big Shock to Global Finances

By    |   Friday, 13 March 2015 08:20 AM

The pool of dollars overseas has exploded, thanks to outstanding borrowings of $9 trillion in U.S. currency by foreign entities, up from $2 trillion 15 years ago.
 
These excess dollars could create a major problem when the Federal Reserve raises interest rates, writes Ambrose Evans-Pritchard, international business editor of The Daily Telegraph.
 
That $9 trillion doesn't have "the protection of a lender-of-last-resort [the Federal Reserve] able to issue unlimited dollars in extremis," he notes.
 
"The result is that the world credit system is acutely sensitive to any shift by the Fed."
 
The impact already is evident in the dollar's surge to multi-year highs against a range of currencies in recent weeks, Evans-Pritchard says.
 
Stephen Jen, a former IMF official now at SLJ Macro Partners, tells Evans-Pritchard that Asian and Latin American companies are now in a panic trying to hedge their dollar debts. But that only pushes the dollar further upward, sparking a vicious cycle. "This is how avalanches start," Jen notes.
 
Economists' consensus forecast is that the Fed will begin raising rates around mid-year. And many experts say the dollar's rally isn't close to an end. That's because economies and monetary policy are heading in different directions in the United States and overseas.
 
"Powerful undercurrents in the world's financial system are swirling beneath the surface. Some hope that the European Central Bank's €60bn blast of QE [quantitative easing] each month will keep the asset boom going as the Fed pulls back, but this is a double-edged effect for the world as a whole. It pushes the dollar yet higher. That may matter more in the end," Evans-Pritchard explains.
 
"On the euro side of things, we knew that QE was going to happen, so the euro move is starting to be baked in," Christophe Caspar, chief investment officer of multi-asset solutions at Russell Investments, tells The Wall Street Journal.
 
"On the dollar side, however, there are still a lot of unanswered questions around the likely timing of a rate hike, meaning that there is still plenty of potential for the buck to rise."
 
The eurozone economy grew only 0.9 percent last year, and Japanese GDP fell in two quarters last year, while U.S. growth totaled 2.4 percent.
 
So it's no wonder that both the Bank of Japan and European Central Bank are easing aggressively while the Fed considers when to raise interest rates.
 
Many experts predict the dollar will soon reach parity with the euro.

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The pool of dollars overseas has exploded, thanks to outstanding borrowings of $9 trillion in U.S. currency by foreign entities, up from $2 trillion 15 years ago.
Evans-Pritchard, Fed, dollar, world
432
2015-20-13
Friday, 13 March 2015 08:20 AM
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