— This is the script of CNBC’s financial news report for China’s CCTV on September 27, 2022.
The Pound’s decline since Friday is certainly due to the newly unveiled fiscal policy that has hit market confidence, but analysts believe it’s still a dollar story when viewed over a longer time frame.
Fahad Kamal
CIO at Kleinwort Hambros
“It’s absolutely a dollar story, the US economy is on a much stronger footing. As you know, we’ve seen a million jobs created there over the last three months. And rates are rising there in the face of red hot aggregate demand, very different to the reason that rates are rising in much of the rest of the world, particularly in the UK, and Europe, where it’s much more defensive and much more in a bid to control inflation. But inflation has been driven by an exogenous shock, not by demand. “
The Fed’s rate hikes so far this year have led to a strengthening dollar, with the dollar index now surpassing 114 points and reaching a 20-year high.
Investors are concerned that a strong dollar will drag down global economic growth and could also lead to a financial crisis in emerging markets.
A stronger dollar means that commodities denominated in dollars, such as oil, become more expensive for buyers using foreign currencies, which could push up inflation levels in their home countries and affect demand. Concerns about the economic outlook also weighed on the price of crude oil, with futures on both WTI and Brent crude falling more than 2 percent on Monday.
In addition, a stronger dollar has had a strong impact on emerging markets. Since many emerging market countries borrow in U.S. dollars, a stronger dollar leads to more debt when translated into national currencies. At the same time, the Fed’s interest rate hike has caused yields on dollar-denominated assets to rise, which has prompted foreign investors to pull money out of emerging market countries and into dollar-denominated assets, causing capital outflows from emerging markets.
We have seen the amount of dollar-denominated cross-border credit outstanding in emerging markets rise dramatically over the past 20 years, with the total amount now four times higher than it was in 2006. Several countries are also on the verge of debt crises due to large depreciations of their currencies and foreign exchange shortages.
In addition, the stronger dollar has made the overseas earnings of U.S. multinationals, when converted to dollars, less, resulting in a lower return on investment. This is directly reflected in the overall decline of the stock market.
The S&P 500 fell below its June low, while the Dow Jones was accelerating lower at the end of the session, re-entering into the bear market territory. Morgan Stanley expects the S&P 500 to slide to a position around 3,000 early next year.
We can see that the dollar strength has a great impact on the global economy and markets. The latest statements from Federal Reserve Bank of Cleveland President Loretta Mester show that further interest-rate increases are needed to stamp out stubbornly high inflation and interest rates will not fall back in 2023. This means the recent upward momentum in the dollar has further to run.
Source: cnbc.com
