The US labour department said this weekend that the unemployment rate in the world’s largest economy touched 10.2% in October, the highest in 26 years. This means that 8.2 million Americans have lost jobs since the start of the recession.
Growing job losses are likely to have several effects, the most important being that the US Federal Reserve will find it hard to raise interest rates despite the need to do so. The fear of even more job losses in the months ahead will dampen consumer sentiment as families prefer to save rather than spend.
These hard facts point to a further decline in the US dollar, which is not just the preferred currency of trade and foreign exchange reserves, it is also replacing the Japanese yen as the new funding currency for the carry trade. A weak dollar and near-zero US interest rates will ensure that this carry trade continues to grow, sending a tsunami of short-term money into Asian stock markets.
Regional regulators will have to be on their guard.