Expert: Stronger dollar hurts emerging market
If global interest rates have to go higher, emerging market interest rates have to go higher
Daily TribuneIf global interest rates have to go higher, emerging market interest rates have to go higher
An economics professor said that a strengthening dollar might hurt many emerging markets and developing countries due to the US Federal Reserve's interest rate increases and investors' reduced risk appetite.
During the second Bangko Sentral ng Pilipinas-University of the Philippines School of Economics Distinguished Lecture Series earlier this week, the University of California, Berkeley economics professor Maurice Obstfeld said the dollar had strengthened considerably since mid-2021 and a contractionary phase of the global financial cycle is now underway.
"We're now expecting a global downturn and activity in the coming quarters, and this will have strong spillovers to emerging markets, even as the Fed may be moderating its monetary policy stance," Obstfeld said.
The paper, "The Global Dollar Cycle," — which Obstfeld and Haonan Zhou of Princeton University authored — used a statistical model that tracks variables in 26 EMDEs. The study showed that dollar-appreciation shocks cause economic downturns.
This has been true since the Bretton Woods system of fixed exchange rates broke down in the early 1970s. The results show how countries can change their policies to lessen the negative effects of a stronger dollar.
Taming inflation possible
Obstfeld said the Fed and other central banks in advanced economies would likely bring inflation under control. Still, he warned that there is a risk that central banks could together cause an unnecessarily sharp global recession.
He said that US inflation has receded and that the core inflation has receded a bit for the last two months and remains "uncomfortably high."
"(The European Central Bank) has remained very worried about inflation and its forecasting. It will be very persistent and," Obstfeld said.
He added that experts are still determining if inflation will come down rapidly as commodity prices fall as oil prices fall as the world goes into recession or not.
Obstfeld said there is a problem for emerging and developing economies against this backdrop, adding that fiscal burdens remain higher.
"If global interest rates have to go higher, emerging market interest rates have to go higher. This increases fiscal burdens and increases the risk of crises which have not so far affected the bigger emerging markets but things could get worse," he said.
"Even if the US goes into recession and the Fed begins to stop raising interest rates and cut them, the recession itself will be associated with tighter financial conditions in the US, and this may hurt emerging markets," he added.
