Firms warn battles to prevent a weakening dollar from crimping exports could be inverted
The big risk is that the Fed’s pledge of an unconditional war on inflation sees ever upward pressure on the dollarUS dollars banknotes at the Ninja Money Exchange, operated by Interbank HD, in the Shinjuku district of Tokyo on June 9 2022. Picture: Toru Hanai/BloombergDevotees of Netflix hitknow well how mayhem and monsters from the show’s foreboding parallel universe seep into regular daily life, with devastating effect.
In the decade after the Fed embarked on bond-buying quantitative easing to ward off deflation, many countries complained the resulting dollar weakness would hurt their trade in a low-growth world and force them to overheat by trying to match the Fed’s easy money. “The move confirms our bullish view on the franc and is the strongest evidence yet of our ‘reverse currency wars’ thesis — the era of targeting weaker exchange rates is over,” Goldman’s currency team told clients, adding that analysis showed a 1% franc rise cut between 10 basis points and 20bps from inflation and saying the Swiss National Bank is likely to seek a 5% rise in the franc’s real exchange rate.
Though her colleague and BOE chief economist Huw Pill on Tuesday downplayed explicit targeting or “fine-tuning” of sterling — taboo in Britain since the pound was turfed out of the European exchange rate mechanism 30 years ago — the cat seems to be out of the bag. The pound is surely a major factor.
Emerging economies — many of whom face far more destabilising food and energy price inflation — have already tried to pre-empt Fed tightening over the past year. But more dollar strength could force them to turn the screw even tighter at a dangerous time.
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