Mighty Dollar’s Win Streak Eyed As Fed Cuts Delayed
With the Fed likely to indicate that any rate cuts are a relatively distant prospect in light of data which continues to suggest the US economy isn't cooling consistent with efforts to badger underlying inflation back to target, it's worth noting that the dollar sat at a YTD high headed into the May FOMC statement refresh.
About a month ago, I declared the "return of the wrecking ball," when the juxtaposition between a third successive US CPI overshoot and imminent confirmation from Christine L
Outside of the US your wrecking ball analogy is looking increasingly relevant. It brings to mind the destruction FX speculators wrought on smaller nations during the “Asian Crisis” in the late 1990s.
The orthodox policy responses pushed by the IMF and US officials, such as Laurence Summers, was to hike interest rates enough to force FX speculators to capitulate. Driving domestic economies into recession was regarded by those geniuses as a worthwhile price to pay.
Political leaders obviously saw things differently. Prime Minister Mahathir of Malaysia went as far as to restrict capital flows out of the country which was met with horror and dismay by orthodox economists and offshore speculators. But as time has passed, his actions have started to be seen in a different light and the IMF strictures seen as unnecessarily harsh.
As then, policymakers in many nations are being forced to choose between raising domestic interest rates to match what’s on offer here or letting inflation run hot via higher prices for dollar-denominated energy and food imports. Neither is welcome for average people in their countries.
It comes down to how much economic damage other nations must endure because US consumers will not put away their wallets and credit cards.
This policy trap is one reason why there is interest in moving off of a US Dollar standard.