Tags: Fed | Dollar | Shortage | Investors | Emerging Markets

FT: Risk of Dollar Shortage May Rattle Investors, Emerging Markets

Image: FT: Risk of Dollar Shortage May Rattle Investors, Emerging Markets
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By    |   Monday, 08 May 2017 09:08 AM

Further monetary tightening from the Federal Reserve reportedly may unsettle emerging markets used to an abundance of dollars.

“The International Monetary Fund and the Bank for International Settlements both pointed to the potential danger in their most recent reports. Bank analysts and investors, too, are beginning to discuss the implications of fewer dollars, particularly for emerging markets, as the Federal Reserve opens the door to further unwinding the multi-trillion stimulus program put in place after the financial crisis,’ the Financial Times reported.

“Fewer dollars would raise the cost of obtaining the currency from the pools that have developed outside the US since the Fed began flooding markets with money via quantitative easing in 2008,” the FT explained.

“That deluge of cash lifted asset prices and pushed down borrowing costs globally. It has also helped spur growth of new markets, such as an international dollar-denominated bond market in Asia, where borrowing has reached record levels this year,” the FT reported.

“Quantitative tightening will be an interesting topic,” says James Montier of GMO, the asset manager. “US monetary policy has been incredibly easy post-financial crisis. If the US is entering a phase of more broader based tightening, the rest of the world will be forced to import it — and that will be an interesting experiment for people who’ve had the best part of a decade on easy money.”

For his part, Federal Reserve Bank of San Francisco President John Williams said his outlook for three or four rate increases in 2017 hasn’t shifted, as the labor market shows signs of expanding beyond its sustainable rate and the economy is operating above potential.

“I haven’t changed, again, my views on what appropriate policy is” for the remainder of the year, Williams told reporters on Friday after a speech in New York, referring to his comments last month that three or four hikes would be required.

On Saturday, at an event in California, Williams said the economy “is operating above potential,” Bloomberg reported.

Fed officials left interest rates unchanged following their meeting this week, indicating that a disappointing first quarter wouldn’t stop them from raising rates twice more in 2017 following a hike in March. In their communique, policy makers described as “transitory” a slowdown in first-quarter growth, while emphasizing that inflation was running close to their 2 percent goal and the labor market continued to strengthen.

reiterated his view that the Fed this year should start shrinking its balance sheet, which grew to about $4.5 trillion when policy makers carried out asset purchases to protect the economy during the 2008-2009 financial crisis and the period of weak growth that followed.

“We want to move our balance sheet down to more normal levels, for a number of reasons,” Williams said at Stanford University. The Fed wants “a balance sheet that quite honestly in the future we could use if needed in a recession.”

(Newsmax wires services contributed to this report).

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Further monetary tightening from the Federal Reserve reportedly may unsettle emerging markets used to an abundance of dollars."The International Monetary Fund and the Bank for International Settlements both pointed to the potential danger in their most recent reports. Bank...
Fed, Dollar, Shortage, Investors, Emerging Markets
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2017-08-08
Monday, 08 May 2017 09:08 AM
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