Sir,
Contrary to your recommendation in “The world gears up for a surge in the greenback” (editorial, August 1), the Federal Reserve would be ignoring dollar movements at its peril. Since a further sharp dollar appreciation would substantially cloud the emerging market economic outlook, that could have a meaningful impact on global economic and financial market conditions.
Surprisingly you gloss over the exceedingly high degree of emerging market corporate US dollar debt exposure that has been spawned by many years of unusually easy US monetary policy. According to the Bank for International Settlements, such corporate dollar borrowing has increased by more than $3tn over the past six years and now constitutes a major risk to the global economic outlook.
In recent policy statements, the Fed has noted that the 20 per cent dollar appreciation over the past year is already having an important impact on the US traded goods sector. Any major setback in the emerging market economies triggered by further dollar appreciation now risks compounding the normal channels by which the strong dollar appreciation to date might impact the US economy.
To be sure, the Fed’s mandate requires it to set a monetary policy that is in the best interest of the US economy. However, in today’s context where a further sharp dollar appreciation can effect global economic and financial market conditions, the Fed would be making a big mistake by turning a blind eye to how a dollar-induced worsening in those conditions might impact the US economic outlook.
Desmond Lachman, American Enterprise Institute, Washington, DC, US
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