The rapid growth of the us dollar threatens developing markets

The US dollar continued to soar in value over Wednesday night, signalling the likelihood of more interest rate rises and spelling trouble for developing countries that have borrowed heavily in the greenback.

With impressive service sector data published on Wednesday and strong jobs figures in the non-farm payrolls expected on Friday, the dollar hit an 11-month high against the yen and drove US treasury yields to their highest since mid-2011. The pound slipped below $1.30.

Rising US bond yields indicate that the Federal Reserve, under its hawkish chairman Jerome Powell, is likely to keep raising interest rates from their current 2.25% well into 2019. They are also unfavourable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies.

The Australian dollar, which is seen as a proxy for emerging Asian markets, slipped below US$0.71 and seems set to dip further. The Indian rupee fell to an all-time low against the dollar on Thursday morning of 73.77 while the Indonesian rupiah has plunged to a 20-year low.

China’s currency, which has suffered as the trade war with the US has intensified, was not immune. The offshore yuan rate reached above 6.9 to the dollar.

“This is a perfect storm for the rising dollar,” said Chris Weston of the online trading firm Pepperstone in Melbourne. “Strong economic performance and the Fed seen [as] happy to take rates higher.

“Lots of countries have issued dollar-denominated debt and as the dollar goes higher, debt levels are exaggerated.”

Bond yields also rose across Asia in a tightening of market conditions which is dangerously out of step with what is happening in the local economies.

“A simple dynamic is playing out in the global economy right now – the US is booming, while most of the rest of the world slows or even stagnates,” said HSBC economist Kevin Logan.

“A Federal Reserve that is raising rates to prevent the US economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying.”

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 1.1% in response, with South Korea, the Philippines, Indonesia and Taiwan all down. Even the Nikkei eased 0.2%, as rising yields offset the boost to exporters from a weaker yen.

Investors now see an 80% chance of a Fed hike in December and have revised upwards their expectations for how high rates may eventually go. Yields on 10-year Treasury debt were at 3.18%, having spiked 12 basis points overnight to the highest since June 2011. It was the steepest daily increase since the shock outcome of the US presidential election in November 2016.

Oil prices have reached four-year peaks as the market focused on upcoming US sanctions on Iran while shrugging off the year’s largest weekly build in US crude stockpiles. Brent eased 18 cents to $86.11 a barrel on Thursday while US crude fell 16 cents to $76.25.