The primary cause of the market chaos is the Federal Reserve’s fight with inflation. Because the central bank has lost the first three or four rounds since prices began to surge in 2021, it is now swinging harder
financial markets are going through their most painful adjustment since the global financial crisis. Adapting to the prospect of higher American interest rates, the ten-year Treasury yield briefly hit 4% this week, its highest level since 2010. Global stockmarkets have sold off sharply, and bond portfolios have lost an astonishing 21% this year.
Yet it is outside America where the financial effects of the Fed’s monetary tightening have been most severe. The surging dollar is painful for energy importers that were already grappling with higher costs. China has responded by making it harder to short the yuan, which in the offshore market hit a record low against the greenback on September 28th. India, Thailand and Singapore haveto support their currencies.
Part of the explanation for the pressure on advanced-economy currencies is that many central banks have hitherto failed to keep pace with the Fed’s tightening—but with good reason, because their economies are weaker. The energy crisis is about to plunge Europe into recession. South Korea and Japan are suffering the knock-on effects of an economic slowdown in China, brought about by its housing crisis and zero-covid policy.
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