Dollar on fire may burn down equity, wreck emerging economies

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By S Jha

New Delhi, October 13: Dollar, stronger by over 20 per cent now after a phenomenal run in the recent few days, is threatening to derail the emerging economies, while the import-dependent nations may face risks of foreign deb service defaults as the Russian war in Ukraine is showing no signs of closure anytime soon.

The US treasury yields spiked over four per cent on Thursday evening, which is a 14 year high, while dollar is at 20-year peak, and the currency observers claim that the most sought after and most traded currency still has legs to run. The equity market is facing the fury of the strong dollar, as hot money is making quick exit for sage returns in the US, leaving the Central Banks in the emerging economies to protect their currencies. Rupee has depreciated by over 10 per cent, and the Reserve Bank of India has already exhausted over $100 billion to shield the Indian currency from sharp depreciation, which otherwise could make inflation too heated in the country.

The US-based equity traders are warning that there is more pain in the store, as the recent data on inflation suggests that the Fed would stay in hot pursuits to push the rates higher, which would automatically result in the withdrawals of the investments from the equity market.

Legendary US trader Mark Minervini on Thursday said: “Rates have been working their way higher and stocks lower with Fed tightening as CPI inflation has yet to show signs of cooling.”

While the equity markets are already bearing the brunt, the emerging economies, developing countries, island nations are increasingly becoming vulnerable for Sri Lanka-like financial crisis, as they are low on the foreign currency reserves, while being dependent on imported fuels. Additionally, there are about 60 countries in Asia, Africa and Latin America who are stuck in the Chinese debt trap as is the case with Sri Lanka, and they may be in deep trouble with a strong dollar, which is the currency of the global trade. It has been widely known that China is unforgiving of its loans and rarely even restructure them, while the rates are higher compared to the financial grants of the multilateral institutions such as the World Bank and the International Monetary Fund.

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