With the Fed set to hike interest rates this week, will a stronger dollar pose a threat to the world economy?
Craig Melling, investment manager at Progeny Asset Management, says Yes.
The recent boost to the dollar since the US election has been welcomed by investors and stock markets alike. However, looking more closely at the impact of a surging dollar leads us to believe that this is a potential setback for the world economy.
First, it’s important to understand dollar strength in the context of rising interest rates. As interest rates rise, the dollar will continue to appreciate. This reflects investors’ appetite to buy the world reserve currency. Yet the impact on equity markets may be negative as it signals the end to cheap money funding stock market investment. Moreover, this will also have a detrimental impact on US businesses as borrowing will become more expensive.
Are the US and the world’s other economies robust enough to withstand a rate hike? Emerging markets in particular will struggle – specifically those borrowing in dollars. As the greenback rises, they will find it difficult to service their debts. With a global economy still recovering from years of low growth, a stronger dollar will prove to be a challenge.
Helal Miah, investment research analyst at The Share Centre, says No.
While an interest rate rise and a stronger dollar will hurt some other economies, like during the taper tantrum in 2013, this hike has been already been priced in by the markets, and shouldn’t spell doom and gloom. However, the Fed is a long way ahead of the rest of the world’s central banks on the path to normalising rates, so the greenback should strengthen against its peers over time as the Bank of England, European Central Bank and Bank of Japan remain accommodative.
Ultimately, interest rates are rising due to the strength of the US economy, and as the most influential in the world, this should feed through to improved demand for goods and services from and among its trading partners, despite Donald Trump’s anti-trade rhetoric. Rate rises will be measured and appropriate to the prevailing economic conditions. Therefore the market should not be fearful of them or an appreciating dollar. This period of ultra-low interest rates needs to come to an end before we fuel another debt crisis.