Rapid-fire interest rate increases in the US are causing headaches all over the world, triggering financial market volatility and currency weakness
The soaring US dollar is propelling the global economy deeper into a synchronised slowdown by driving up borrowing costs and stoking financial-market volatility, and there’s little respite on the horizon.
Both India and Malaysia made surprise rate hikes this month. India also entered the market too to prop up its exchange rate.Advanced economies haven’t been spared either: In the past week, the euro hit a new five-year low, the Swiss franc weakened to hit parity with the dollar for the first time since 2019 and Hong Kong’s Monetary Authority was forced to intervene to defend its currency peg. The yen also recently toughed a two-decade low.
Developing economies are in danger of a “currency mismatch”, which occurs when governments, corporations or financial institutions have borrowed in US dollars and lent it out in their local currency, according to Clay Lowery, a former US Treasury assistant secretary for international affairs who is now executive vice president at the Institute for International Finance.
“Tighter US monetary policy will have large spillovers to the rest of the world,” said Rob Subbaraman, head of global markets research at Nomura Holdings. “The real kicker is that most economies outside the US are starting in a weaker position than the US itself.”Many manufacturers say the high costs they are facing means they are not getting much of a dividend from weaker currencies.
But that is causing yet another source of fragility for developing nations used to a strong yuan offering their markets an anchor.
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