Investment Manager Craig Melling discusses the US interest rate hike in City AM.
With the Fed set to hike interest rates this week, will a stronger dollar pose a threat to the world economy?
Craig Melling, investment manager at Progeny Asset Management, says Yes.
The recent boost to the dollar since the US election has been welcomed by investors and stock markets alike. However, looking more closely at the impact of a surging dollar leads us to believe that this is a potential setback for the world economy.
First, it’s important to understand dollar strength in the context of rising interest rates. As interest rates rise, the dollar will continue to appreciate. This reflects investors’ appetite to buy the world reserve currency. Yet the impact on equity markets may be negative as it signals the end to cheap money funding stock market investment. Moreover, this will also have a detrimental impact on US businesses as borrowing will become more expensive.
Are the US and the world’s other economies robust enough to withstand a rate hike? Emerging markets in particular will struggle – specifically those borrowing in dollars. As the greenback rises, they will find it difficult to service their debts. With a global economy still recovering from years of low growth, a stronger dollar will prove to be a challenge.
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