Expectations that the Federal Reserve is on course to start tightening policy has spurred fears of a return of last year’s emerging market turmoil, but Societe Generale tips a strong dollar as a bigger risk. “A strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum,” Michala Marcussen, global head of economics at Societe Generale, said in a note dated Sunday.
The U.S. dollar index has climbed around 7 percent this year, with the Fed now nearly completing the tapering of its asset purchases, with markets widely expecting interest rate increases to begin sometime next year. Some analysts are concerned this will spur a repeat of the “taper tantrum,” when concerns about the Fed’s move to begin tapering caused a brutal selloff in emerging market assets earlier this year and last year.
“Hope today is that a strong dollar will cap U.S. inflation, delay Fed tightening and boost exports to the U.S.,” Marcussen noted, but she believes for that to happen, the U.S. dollar would need to strengthen so much that it would signal much weaker growth in the rest of the world.
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