Domestic Bonds

Who has the stomach – or the stubbornness – to oppose the dollar?


It is becoming increasingly difficult for some emerging markets to hide from the dollar’s devastation. Staying on the sidelines or slowing while US interest rates climb risks further deteriorating already weakened currencies – and worsening inflation at home. To stand against this current requires courage and, perhaps, more than a hint of stubbornness.

In an environment of stubbornly high inflation, almost no potential Federal Reserve hike seems too big to be outlandish. Just a few months ago, the idea that a 100 basis point hike in July would be on the table seemed extreme. Now it is considered plausible. The dollar extended its push accordingly, hitting a record high on Thursday against a basket of developed and emerging market currencies.

So much for America’s eclipse as the backbone of the global economy. The euro fell to parity with the dollar for the first time in more than two decades. The Thai baht slipped to its weakest level since 2006 on Thursday, and the Turkish lira flirted with an all-time low.

Central banks in South Korea, New Zealand, Singapore and the Philippines have raised borrowing costs in recent days, the latter two in surprise interventions. It won’t lift their exchange rates in a lasting way tomorrow, but it could protect them from dramatic setbacks. These countries have good local reasons to act: inflation is too high for home comfort. What about holdouts who refuse to raise rates, or prefer cuts, like Turkey? Or nations that have taken a less mercurial path, but have nonetheless weathered the rate rush? Thailand is a good example of the latter approach.

Perhaps one of the most overlooked inflation stories of the past week has been delivered by snail mail. Thailand Post Co. has raised prices for domestic letter and parcel deliveries. It may seem like a small beer compared to the tumult on Wall Street or questions about the sustainability of the euro system, but this is the first such initiative by the state-owned enterprise in almost two decades and it reflects cost pressures that have become too great to ignore. It took approval from the Thai cabinet, which is grappling with the biggest increase in overall consumer prices in 14 years.

It is not unreasonable to think that the Bank of Thailand will be very far behind. The central bank said on Thursday – after surprise hikes in Singapore and the Philippines – there was no need for an emergency meeting. This week, the bank said it wanted to phase out housing, “a smooth takeoff”. With Thailand far behind its regional and global peers, it is unwise to take this as set in stone. A soft takeoff is a lot like a “soft landing,” the outcome every central bank aims for when growth falters. History is not cluttered with great examples.

What counts as good news in Turkey is that annual inflation reached 78.6% in June; economists were counting on 79.9%. Erdogan has been burning central bank governors in a bid to get the outcome he wants, which is an unlikely combination of recovering the lira and lowering interest rates. The last central banker who raised rates didn’t last very long. The lira is the worst performer among emerging markets, down around 24% this year. The pain is getting worse: the cost of insuring bonds against default has recently skyrocketed.

Turkey is trying to muddle through, hoping that global inflationary pressures will ease – wishful thinking – and improvise. Late last month, regulators imposed restrictions on commercial lira loans to businesses if they hold too much foreign currency. The idea is to encourage businesses to sell dollars and buy liras. It does not inspire confidence. The lira is close to a record high. “Turkey’s economic policies are increasingly interventionist and unpredictable,” Fitch Ratings said in a report on Thursday.

At some point, the global mania for ever-escalating interest rate bets will die down and those who oppose it might look like heroes. Everything will have to go well, and it would be imprudent to count on that. Two important and reasonable exceptions: China, where the economy struggled in the last quarter and where inflation is relatively contained, and Japan, where deflation or too low inflation has been the biggest threat since the start of the 1990s. The Chinese government also has a large direct influence on its exchange rate. As market forces are reflected in the general direction of the yuan, the central bank limits daily swings to a tight range. The state guides the yuan against a basket of currencies, but the greenback matters most.

The king dollar still rules and shapes much of the economic and financial life on earth. It turns out that the American decline is not ubiquitous.

More from Bloomberg Opinion:

• Hiking early doesn’t mean taking a break later: Daniel Moss

• What it will take for the Fed to control inflation: Bill Dudley

• Rushing to Double Digits – What Happens Now? : John Authers

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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