Economists and investors are looking forward to another golden age for the dollar as the US economy starts to improve and the Federal Reserve begins to taper its bond buying program, the Financial Times reported. However, a stronger US currency could spell potential trouble for developing countries.
The report cited the crises felt by emerging markets in the past when the dollar grew strong. The currencies of a number of countries plunged in the 1980s and 1990s when pressure caused pegs to the dollar to break. As a result, a skyrocketing increase was experienced in the burden of dollar-denominated debts. Trouble followed as many countries defaulted on their debts.
If predictions about the growing strength of the US dollar are correct, many economists fear that the same thing will happen again. George Magnus of UBS told FT, "Emerging markets have a lot to worry about from a resurgent dollar. Lightning rarely strikes the same place twice, but they are still very vulnerable."
Signs are already being felt, the report said. After the Federal Reserve unveiled its intention to start tapering its stimulus program last summer, currencies of the emerging markets plunged against the stronger dollar. More turbulence followed in the developing economies after the Fed proceeded with its bond buying reduction in December and the dollar continued to gain strength. The US dollar has continued to rise a single percent this month despite a weak jobs report given last week. The currency is expected to continue its upward trend in the coming year, the report said.
M&G Investments Fund Manager Michael Riddell told FT, "If history is any guide, a strengthening US dollar is bad news for developing countries. I think we are still at the tremor stage and we may be stuck here for a while but 'the big one' is still to come."
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