Post-Brexit dollar surge presents Fed with new conundrum

27 Jun 2016   Economy, USA

As Federal Reserve officials anxiously scan the aftershocks of the Brexit vote in the coming days, the reaction of the US dollar in currency markets will be front and centre of their attention.   The dollar rose sharply on Friday in response to the UK’s vote to leave the EU, as money flowed into perceived havens. But a further surge would inject a destabilising element into already unsettled markets and add pressure on the Fed to delay any future rate rises.  Lewis Alexander, US economist at Nomura, said the dollar would be “the first order of business” for the central bank as it examines the markets, followed by gyrations in credit and equities.

The dollar has been a main driver of Fed policy for the past two years because of the drag that a strong currency has imposed on US exports, inflation and corporate earnings. Nearly half of sales by S&P 500 companies in 2014 were generated overseas, according to UniCredit research.   The strong dollar has also injected financial volatility into emerging markets — as seen in January and February this year. It could pose a particular threat to China by rekindling worries about capital outflows and currency devaluation. It is also a potential menace to other emerging markets because of their large stocks of dollar-denominated debts.

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