Dollar funding squeeze will threaten indebted nations

Significance

The Fed also released its ‘Beige book’ summary of economic conditions in the twelve Fed districts; all reported growth and higher consumer spending and expressed concerns about trade. Having lost more than 10% between US President Donald Trump’s election and the end of March, the dollar index has since strengthened by more than 5%. This is contributing to tighter global financial conditions and dollar liquidity. Emerging markets (EMs) are especially vulnerable because of their reliance on dollar funding, especially in corporate debt markets.

Impacts

• Despite the outflows, net inflows of EM bond and equity funds are over 45 billion dollars in 2018; EM outflows may slow as markets adjust.
• The Brent crude oil price is near its highest since 2015 and likely to remain at this level, adding to risks in net fuel importers.
• Powell’s comments did not alter expectations of one or two more rate rises in 2018; markets see a near 60% chance of a fourth in December.