The markets have started to take the prospect of an earlier than expected rates hike in the US seriously. Robust employment figures have invited the FED to act swiftly. Even if the dollar’s unexpected strength might subdue the current expansion, the monetary authorities cannot ignore the latest data pointing to a well-entrenched recovery. Should the FED fail to take swift action, its credibility would suffer a severe blow.
This new mood is heavily weighing on market sentiment. Most investors are discounting an early move that would push the exchange rate to fresh heights. This quick anticipation is wrecking emerging economies and might affect global prospects for growth. Brazil is already suffering a massive exit of hot money, its currency spiraling out of control. Others might follow a similar downward pattern.
As the Euro becomes weaker, an unsettling of global financial markets has got underway. Even if the move was largely accounted for, its swift unfolding has taken many by surprise. Banks holding large exposures in emerging countries are bound to suffer the ensuing consequences. That is a nasty prospect likely to be reflected in dwindling profits.
In Europe, the backlash will hit exports and growth just when frantic efforts at trying to mend its dismal record are getting underway. This is a bad omen against hopes of steering the economy back on track again. We are bound to suffer the depressive effect of higher US rates, on top of the pressure a strong dollar position exerts on global markets.
The ECB’s wait-and-see strategy – waiting until the last to use all its firepower- has proved an ill-judged strategy. It deprived Europe of much needed stimuli when it enjoyed a window to fully enforce the policy. Now, the monetary thrust may have materialised too late.