Strong dollar may bash emerging markets, US economy

NEW YORK: The headlines are full of scary reports about the dollar's rise to a 14-year high against a basket of six major currencies. Its strength will hurt US manufacturing while triggering capital flight from emerging markets, economists say . The appreciation “is a real serious noose around the neck of the global economy ,“ David Beckworth, a senior research fellow at the Mercatus Center at George Mason University in Ar lington, Va., said in November.

What's really alarming, though, is that even though the dollar has jumped 6 per cent against the euro and 12 per cent against the yen since the US Presidential election, it remains well below its historic highs. If its rise to date is causing trouble, imagine how much worse things could get if it went on a serious upward run. Fundamental factors are driving the dollar upwards. Because US growth is strong and unemployment low, Fed policymakers are projecting three more quarter-point increases in short-term rates in 2017.

That will tend to push up the dollar by making US Treasuries and other fixed-income investments more lucrative. Investors are also betting President-elect Donald Trump will touch off a growth spurt through tax cuts.

Meanwhile, “the eurozone debt crisis and the travails of the Chinese renminbi have weakened the dollar's main rivals and cemented its dominance as a key benchmark for other currencies,“ economist Eswar Prasad wrote in an e-mail.