Turkey's crashing lira highlights a key trend in 2018. While President Donald Trump and the Fed aren't to blame for overseas crises, their policies are exacerbating problems as the U.S. enjoys relative prosperity. Now emerging market woes increasingly are an issue for Wall Street, as the surging dollar drags on global growth and cuts into S&P 500 earnings.
XFew emerging markets are in as bad shape as Turkey. Its economic position is probably untenable, as the lira's fall has sparked rampant inflation and made it impossible to repay an excess of foreign debt denominated in other currencies. President Erdogan's belief that higher interest rates spur inflation has make it hard for Turkey's central bank to gain control. European banks with exposure to Turkey took it on the chin on Friday, as the European Central Bank expressed concerns about such lenders.
The S&P 500 index fell 0.8% on the stock market today. The Dow Jones slid 1% and the Nasdaq composite 0.8%.
Yet U.S. policies have undoubtedly expedited and exacerbated the crises. As U.S. growth surges thanks to an unprecedented late-cycle fiscal boost from tax cuts and federal spending, and the Fed takes a hawkish tilt on interest rates, the dollar has appreciated close to 8% since March vs. advanced economy currencies and significantly more vs. emerging market currencies. Money that had been gravitating toward emerging markets amid the recovery in global growth that began in 2016 is now looking for safety and opportunity in the U.S.
Trump Trade War Lifts Dollar
On top of that, Trump's aggressive use of tariffs and sanctions has further put a chill on investment. China's currency, the yuan, has sunk about 10% vs. the dollar in recent months, which Beijing has blamed on Trump tariffs.
Rather than recognizing he's at least partly responsible, Trump has viewed falling overseas currencies as hostile, intentional actions to gain a trade advantage. On Friday, Trump tweeted that due to the fall in the lira, he had doubled steel and aluminum tariffs on Turkey to 50% and 20%, respectively. That news sent the lira falling further and pressured U.S. stock markets.
Trump has had reason to help push Turkey, on the precipice of a massive crisis, over the edge. Last week, the U.S. imposed sanctions on Turkey, an unprecedented step against a NATO ally, for holding American evangelical pastor Andrew Brunson as hostage since 2016. Turkey claims he played a role in a failed military coup.
Fed Rate Hikes Pressure Currencies
Back in 2016, when China's currency sank vs. the dollar amid concern about capital flight, then-chair Janet Yellen halted a nascent Fed rate hike campaign. Fed statements then stressed global economic and financial market conditions, implying that the Fed had really become the central bank of the world. But so far the Fed under Jerome Powell, who succeeded Yellen in February, seems to be unconcerned about the global impact of Fed tightening.
On Friday, currencies from Argentina to Mexico suffered significant losses, though not nearly as bad as Turkey's lira. But it's not just emerging market currencies that are sinking against the dollar. The euro fell below $1.14 on Friday for the first time since June 2017. That may be partly because of Turkey's closer proximity and deeper financial ties. But the euro has been steadily sinking as the Fed has turned more hawkish and the ECB delays ending its financial market interventions.
Last weekend, Trump tweeted that the U.S. was winning the China trade war. His proof: China's reeling stock market vs. the thriving U.S. economy and stock market. Yet there are two potential problems. For one, Wall Street may still be underestimating Trump's determination to escalate the China trade war. Further, as Friday's market action reminds, it's hard to be an island of prosperity in a globally connected market. The rest of the world's problems often wash back up on American shores.
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The post Dollar Hits 14-Month High As Trump, Fed Wallop Turkey, Emerging Markets appeared first on Investor's Business Daily.
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