How the Fed’s Rate Hikes May Impact Asia

The US Federal Reserve responded to the 2007 financial crisis by reducing interest rates to stimulate spending and investment. Analysts since warned that a rate lift “could pose a challenge to a number of emerging market economies – particularly across Asia, a top exporter to the US – by pushing up bond yields, augmenting capital outflows and depreciating currencies,” reports Deutsche Welle. The Fed lifted its target band by a quarter of a percentage point to 0.25 to 0.5 percent and signaled willingness for more increases in 2016. Global markets responded well, though countries that are big exporters, especially commodities, and those with high debt levels could be vulnerable to more hikes: China, South Korea, the Philippines, Thailand, Cambodia and Bangladesh. Investors will monitor how China responds, whether it keeps the yuan tied with the dollar or allows the value to fall, leading to capital flight. The article notes, “The decision by the PBoC in December to launch a new index tracking the CNY against a basket of currencies indicates that Chinese authorities may indeed be considering setting the yuan exchange rate against a trade-weighted basket of currencies, rather than just the USD.” Also key for export nations is whether the US can sustain market strength. – YaleGlobal