BackDollar shock
Higher US interest rates when other countries are still keeping rates low can only mean one thing: a dollar rally
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The global economy has been awash in excess liquidity for more than six years now. Most central banks are still busy either reducing interest rates or actually printing more money to buy bonds.
The US will soon begin moving the other way. Janet Yellen indicated on Wednesday that the US Federal Reserve (Fed) was moving closer to an interest rate hike. This will just be a tentative first step towards a more normal monetary policy, since the Fed’s balance sheet is still 2.5 times bigger than it was before quantitative easing began in 2009.
Higher US interest rates when other countries are still keeping rates low can only mean one thing: a dollar rally. History tells us that such a dollar rally has four main effects: emerging market assets face selling pressure, oil prices fall, gold loses its lustre, and companies with lots of dollar debt get into trouble. India has to worry about the fourth effect most of all. The upshot: the risks to economic stability are at the corporate rather than macroeconomic level.
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