Forex

Stronger U.S dollar may lead to a global recession – BoA strategist

  • The world is currently facing a global economic slowdown.
  • Emerging markets can't help avoid the global recession as long as the U.S dollar keeps its strength.
  • U.S dollar has gained significantly against currencies of emerging markets this year.
  • FED is expected to cut rates further in its next meeting set for the upcoming week.

The currently prevailing global economic slowdown is turning into a hot debate in the world of business and finance. In an instance of global recession, it is usually the emerging markets that rescue the global economy with their relatively faster growth rates. According to the financial experts, however, such markets are failing to fuel the global economy this time due to a persistently strong U.S dollar.

Following the global economic slowdown and the majority of figures hinting at a weaker U.S economy, investors are on a lookout for the current options to invest their money with a promise of greater returns.

U.S Dollar Is Preventing Emerging Markets From Avoiding A Global Recession

As such, emerging markets like Brazil, South Korea, and India are known to grow at a faster pace as compared to the developed countries like that of the United States of America and Germany. However, the faster growth rate is often linked with greater risk as well. The emerging markets usually rely greatly on commodity prices and have a reputation for being export-driven.

In a recent comment, Mr. David Hauner of Bank of America has remarked that after the financial crisis back in 2009, it was China that printed a growth of around 9% that helped the global economy to accelerate. Unfortunately, China has remarkable economic problems of its own this time that are manifesting as its economy running out of steam. In simpler words, Mr. Hauner has highlighted that the world can’t rely on China to be the savior of the global economy this time.

The stronger U.S dollar stands in the way of emerging markets to help avoid a global recession. Such nations are known to borrow in U.S dollars, the strength of which can turn their debts costlier.

Mr. Hauner further added that while the Federal Reserve has been active in cutting rates to promote weaker U.S dollar, the process hasn’t been as efficient so far as is required to prevent the global recession.

CME FedWatch Tool has reported a greater than 90% probability that FED will cut rates in its meeting next week by another quarter percentage point. How strongly would that contribute to weakening the U.S dollar will be revealed in time.

U.S Dollar’s Performance Against Emerging Markets

Against the currencies of the emerging markets like Brazil, India, and South Korea, the U.S dollar has gained 4.1%, 1.9%, and 5.5% respectively this year. Mr. Hauner has also pointed out that the greatest customers for these emerging economies use Euros for payment. The U.S dollar’s gain of 3.2% against Euro this year further worsens the scenario at large.  

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