“The world is on a dollar standard, not a euro or a yen standard, and that is why it matters so much what the Fed does,” said Stephen Jen, a former IMF official now at SLJ Macro Partners.
He says the latest spasms of stress in emerging markets are more serious than the “taper tantrum” in May 2013, when the Fed first talked of phasing out quantitative easing.
“Capital flows into these countries have continued to accelerate over recent quarters. This is mostly fickle money. The result is that there is now even more dry wood in the pile to serve as fuel,” he said.”
Mr Jen said Asian and Latin American companies are frantically trying to hedge their dollar debts on the derivatives markets, which drives the dollar even higher and feeds a vicious circle. “This is how avalanches start,” he said.
Read the original article on the ‘The Telegraph’ website.