It used to be the Japanese Yen that was fuelling the carry trades in the 1990s. Now, the US dollar is doing just that. Ever since the mortgage crisis in 2008, the Federal Reserve has lowered the Fed Funds Rate to near zero. This has caused an exodus of US money looking for better returns. The US dollar has flooded emerging markets causing a rise in asset prices.
The inflow of funds to emerging markets has also caused their currencies to appreciate. This is causing economic disruptions there. To counter this, some countries like Brazil and Taiwan have resorted to capital controls.
The big question is what happens when the carry trades are unwound. Will the emerging economies experience a sharp drop in asset prices? What about recession and deflation? Are the economies prepared for this? Who knows?
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