The dollar has jumped around 25% over the last number of months. Such a wild swing is likely to hit both exports and foreign income for US firms. Moreover, it is likely to stiffen the Fed’s the monetary stance in a more decisive way than any rate hike would in the near future. Room for manoeuvre in raising short-term interest rates narrows markedly under such conditions, while decreasing prospects for growth and denting inflation expectations.
It is an intractable dilemma confronting the FED. A rate adjustment seems vital in order to keep its promises to do away with the era of cheap money. Yet, in doing so, it might sap the life from the current economic upswing.
Oil prices are putting a solid lid on inflation. The excess supply downplays any risk of a significant U-turn in this market even if volatility could leads to unpalatable surprises. Low revenues in exporting countries are sharply reducing those countries’ ability to act as key drivers of world trade. The rise in the dollar also puts other emerging markets under strain, cutting growth and investment prospects, as the allure of higher rates sees hot money flow back to the U.S.
Europe faces a dim global outlook that could hamper its potential to harness an export-led recovery. The lack of a comprehensive fiscal policy block means it seems ill equipped to switch to an inclusive domestic expansion policy. The investment plan tabled by the European Commission is no match for the incoming challenges. Moreover, the Greek debt crisis could prove a mere harbinger of the huge problem lying ahead, as mounting liabilities raise uneasy questions on how to pay them back. For the time being, the huge QE programme has drowned out such concerns. Sooner rather than later, they are bound to resurface.
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