The bets are on a cut in US interest rates on 18 September, the scheduled date of the next meeting of the Federal Reserve. The current market belief is that a drop in US interest rates will prop up equity prices.
It is never so simple, especially at times such as these. The prospect of lower US interest rates has sparked off a huge sell-off in the dollar, which is now trading at a 15-year low against its top global peers. The fall in the dollar, if it is sustained, will have huge implications for the global economy.
Okay, let’s start counting. A weak dollar means that other currencies strengthen, including the rupee. That could affect exports. Then there is the $2 trillion or so invested by various central banks in dollar assets. The value of these investments will fall. And there is some empirical evidence to show that oil prices rise when the dollar is weak, as oil exporters try to protect their dollar earnings.
In short, there are no easy exits.