Daniel Moss

Who Has the Stomach — Or Obstinacy — to Stand Against the Dollar?

It’s getting harder for some emerging markets to hide from the dollar’s rampage. Staying on the sidelines or going slow while US interest rates climb risks further degradation of already weakened currencies — and a consequent worsening of inflation at home. To stand against this tide requires fortitude and, perhaps, more than a touch of obstinacy.

In an environment where inflation is stubbornly elevated, almost no prospective Federal Reserve hike seems too big to be outlandish. Just a few months ago, the idea that an increase of 100 basis points in July would be on the table seemed extreme. Now, it’s considered plausible. The buck has extended its surge as a result, hitting a record high Thursday against a basket of developed and emerging-market currencies.

So much for the eclipse of America as the fulcrum of the world economy. The euro has slumped to parity with the dollar for the first time in more than two decades. The Thai baht slid to its weakest since 2006 on Thursday, and the Turkish lira flirted with an all-time low.

Central banks in South Korea, New Zealand, Singapore and the Philippines ratcheted up borrowing costs the past few days, the last two in surprise interventions. That won't turn around their exchange rates on a sustained basis tomorrow, but it might help cushion them from dramatic retreats. These countries have good local reasons to act: inflation is too high for comfort at home. What about recalcitrants who refuse to raise rates, or prefer cuts, like Turkey? Or nations that have pursued a less mercurial path, but have nevertheless resisted joining the rate stampede? Thailand is a good example of the latter approach.

Perhaps one of the most overlooked inflation stories from the past week was delivered by snail mail. Thailand Post Co. raised prices for domestic letter and parcel deliveries. This might seem small beer relative to the tumult on Wall Street or questions about the durability of the euro system, but it's the first such move by the state enterprise in almost two decades and, it reflects cost pressures that have become too significant to ignore. It required sign off by the Thai cabinet, which is wrestling with the biggest increase in overall consumer prices in 14 years.

It's not unreasonable to think the Bank of Thailand will be very far behind. The central bank said Thursday — after the surprise hikes in Singapore and the Philippines — that there's no need for an emergency meeting. This week, the bank emphasized it wants to gradually withdraw accommodation, “a smooth takeoff.” With Thailand far behind regional and global peers, it’s unwise to consider this set in stone. Smooth takeoff sounds a lot like “soft landing,” the outcome every central bank aims for when growth falters. History isn't cluttered with great examples.

What counts for good news in Turkey is annual inflation picking up to a 78.6% in June; economists had forecast 79.9%. Erdogan has burned through central bank governors in an effort to get the outcome he wants, which is an unlikely combination of a recovering lira and cuts in interest rates. The last central banker who lifted rates didn't last very long. The lira is the worst performing among emerging markets, down about 24% this year. The pain is getting worse: the cost of insuring bonds against default has soared recently.

Turkey tries to muddle through, hoping that global inflationary pressures will ease — wishful thinking — and improvising. Late last month, regulators slapped restrictions on commercial lira loans to companies if they hold too much foreign currency. The idea is to encourage firms to sell dollars and buy lira. It isn't inspiring confidence. The lira is near a record low. “Turkey’s economic policies are increasingly interventionist and unpredictable,” Fitch Ratings declared in a report on Thursday.

At some point the global mania for ever-escalating bets on interest rates will subside and those that demurred might conceivably look like heroes. Everything will have to go right, and it would be imprudent to count on that. Two big, and reasonable, exceptions: China, where the economy struggled last quarter and inflation is relatively contained, and Japan, where deflation or too low inflation has been the greater threat since the early 1990s. China's government also exerts great and direct influence over its exchange rate. While market forces are reflected in the yuan's general direction, the central bank limits daily fluctuations to a tight range. The state guides the yuan against a basket of currencies, but the greenback matters most.

King dollar still reigns and shapes much economic and financial life on earth. Turns out American decline isn’t all pervasive.