Uncertainty is a touch stronger, outlook a shade lighter

The United States remains the cornerstone of the global economic system, and the US dollar is the world’s key reserve currency. Even little shifts in its economic and political system have significant bearings on currencies, bourses, bonds, and economies at large. The latest news to create ripples is the interest rate hike by the Federal Reserve. As growth in the US gets a “touch stronger” and employment “a shade lower” the Federal Reserve decided to increase its interest rates. It is the second time in more than a decade that the Fed dared to move and as a result, currencies globally took a beating. The dollar hit a 13-year high against a number of them. The dollar index, which measures the US currency’s strength against major currencies, was trading at 102.63—up 0.85 per cent from its previous close of 101.76.

In the region, the greenback hit a record high against the Turkish lira. It was trading at 20-month high against the euro. A number of Asian currencies also took a battering as the greenback strengthened. At the time of writing, the Japanese yen was down 1.2 per cent, and South Korean won had slipped 0.72 per cent. Taiwan dollar, China renminbi, Thai baht, Malaysian ringgit, Singapore dollar, Philippines peso and Indonesian rupiah were down in the range of 30 to 60 basis points. This effectively will impact exports of the countries, and their buying capacities. Gold, too, has hit its lowest level since February.

So does it mean that the nice long ride in terms of low interest rates is over for the US? And probably for other nations that toe the line? The Central Bank in the UAE, for one, has raised rates on certificates of deposit by 25 basis points, and so have others in the region. The increase will be passed on to consumers through a marginal increase in lending and deposit rates, but the affect will be muted for now. The Bank of England, on the other hand, decided to maintain status quo in

central bank in the Uae, for one, has raised rates on its certificates of deposit by 25 basis points, and so have others in the region. the light of an inflationary environment.

China might get cold as higher interest rates in the US could make it harder for it to manage its exploding debt. The Asian giant relies heavily on borrowing to fuel growth, and is identifying ways to block capital from fleeing to more favourable shores like the US.

Bruised by the recent financial crisis, the global economy isn’t out of the woods yet. Growth is still limping, and requires structural reforms and policy initiatives beyond tinkering of monetary policies. Low interest rates have inundated the system with cheap money, which always hazards causing bubbles. Dr Raghuram Rajan, the renowned economist credited with predicting the fault lines in the US economy, had recently warned against such moves, calling such policies as “traps”. Low interest rates, according to him, should not be a substitute for other instruments of policy and various kinds of reforms should be used to encourage growth. The US isn’t certain of the pace of growth, and neither is the world. With Trump assuming office next year, the UK moving towards Brexit, and China and India dealing with its own set of problems that are impeding growth, it is hard to find green shoots. For now, uncertainty is a touch stronger, and all forecasts a shade lighter. —suneeti@khaleejtimes.com