Investors and a large section of the world are about to see the downside of the Fed tapering back its extraordinary stimulus or QE. The massive injections of liquidity with interest rates at
historic lows caused by the U.S. central bank’s asset purchase program sent the greenback lower and pushed investors into higher yielding assets elsewhere. But higher yield is the reward for higher risk. Given that rates everywhere were relatively low, the higher risk assets tended to be the riskier emerging market types that most investors would never look at in more normal times. Remember the rise of the BRICs? Brazil, Russia, India and China? That then came to include a few other luminaries such as South Africa. It was good while it lasted. More than a few smaller nations threw their weight around and said it was time they had their place at the table when global politics and economics were being discussed.
But the influx of cheap dollars into those higher risk economies is about to be paid for by way of falling domestic stock prices and other assets such as real estate and government debt as the same international investors choose to withdraw their dollars. It’s already apparent in a place like India with the rupee at record lows and the Indian central bank powerless to prevent it. The Brazilian real is also struggling. Investors looking for the next crisis already have it.
Eventually it will come back to haunt the developed economies as these things have in the past. Remember the Asia crisis of 1997 and the Russian debt default of 1998? But for trading the dollar it’s all a good thing. Not only will it benefit from flows on the back of an end to QE and economic growth it will also get a bid on some safe haven flows.