After the Swiss National Bank (SNB) has undermined global confidence in regulators, any sudden action by the US Fed might trigger a feverish buyout of the dollar, pushing its FX rate sky-high, demolishing the entire architecture of international trade in goods and services.
MOSCOW, January 21 (Sputnik), Kristian Rouz — The recent shock to the currencies markets, having come from Switzerland on 15 January, when the franc appreciated by 23% in a single-day trading session, has badly damaged the international financial stability, with capital leaving the Eurozone and investors feverishly buying out gold and US bonds. Such a dramatic change in FX rate of one of the global reserve currencies has triggered major debt risks worldwide, from Eastern European mortgages to Russia’s burden of excessive corporate debt. Now, across the Atlantic, the robust economic growth and market optimism in the US have spurred the anticipation of the Federal Reserve’s interest rate hike, inevitably triggering the dollar to strengthen.
The issue is, the scope of the possible fluctuations in the dollar’s FX rate as a result of the Fed rate hike is yet unknown. It is hardly possible that the initial rate increase would exceed 0.25%. However, after the January, 15 unexpected move of the Swiss National Bank (SNB) to eliminate the franc’s peg against the euro, markets’ confidence in predictability of central banks and other regulators has diminished worldwide. It means investors are psychologically ready for the Fed interest hike without warning.
Lack of trust to the regulative bodies makes the situation flammable. While monetary easing triggers a sell-off in the national currency (which is expected to happen to the euro tomorrow), the anticipated in the US monetary tightening means less dollars will be readily available in the form of loans. Even a hint at an upcoming rate hike will push the dollar up. A sudden Fed action, similar to the recent ‘SNB surprise’ will prompt a panic buyout of the dollar. As the dollar is a more common world’s reserve currency than the franc, the scope of a possible hike in global demand for the greenback would be immense.
Another kind of shock possibly coming from the Fed in the nearest future might be a series of delays in interest hike. According to a consensus forecast, the Fed would raise interest sometime around June this year. If the move comes earlier, the dollar goes up. Any heel-dragging would stave off demand for the ‘dead presidents’, and the dollar goes down.
Full article: After Francs Comes Dollar: Greenback Might Skyrocket Soon (Sputnik News)