Post By Journey Brought From OOM & F
Strong Dollar May Have ‘Profound Impact’ On World Economy
Published: Dec 8, 2014 8:03 a.m. ET
LONDON (MarketWatch) — With the dollar marching closer to an eight-year high, the impact of a solid greenback has started to worry traders and economists.
The Bank for International Settlements, referred to as the central bankers’ bank, warned in its quarterly review that the strengthening dollar could “have a profound impact on the global economy,” and particularly on emerging markets.
“Should the U.S. dollar — the dominant international currency — continue its ascent, this could expose currency and funding mismatches, by raising debt burdens.
The corresponding tightening of financial conditions could only worsen once interest rates in the United States normalize,” Claudio Borio, head of the monetary and economic department at BIS, said in a briefing about the quarterly review, which was published on Sunday.
The comments come at a time when investors are speculating when the Federal Reserve will introduce its first rate hike and lift the benchmark interest rates from its record low of close to 0%.
A stellar U.S. jobs report on Friday furthered the expectation that the first tightening will come earlier than the mid-2015, helping the ICE Dollar Index DXY, -0.01% log its largest weekly gain in five weeks. On Monday, the index continued to climb and was flirting with levels not seen since 2006.
While the appreciating dollar might be attractive for Americans traveling overseas, it seriously affects other parts of the world economy, and in particular countries and companies that have taken out loans in dollars. In this regard, emerging markets could be facing a major setback, as they pay back and service the debt they’ve taken out in the U.S. currency.
BIS estimated that since the financial crisis, international banks have continued to increase their cross-border loans to emerging-market countries, amounting to $3.1 trillion. Most of this debt is in U.S. dollars.
That means if the local currency continues to weaken against the dollar it “could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” BIS said in the quarterly report.
Outstanding loans to China alone have more than doubled to $1.1 trillion since 2012, making the country the seventh largest borrower world-wide and sensitive to large swings in foreign currencies. Additionally, Chinese individuals have borrowed more than $360 billion through international debt securities, according to BIS.
“Any vulnerabilities in China could have significant effects abroad, also through purely financial channels,” Borio said in his remarks.
The health of the Chinese economy is already closely monitored by investors, as the country is a major driver of global growth. Trade data out on Monday missed expectations, reigniting fears of a wider economic slowdown.