If Asian exchange rates broadly move significantly lower in response to China’s move, the Fed will be forced to tighten much less than it otherwise might have, in our view. A significant depreciation in the Asian currency basket would potentially bring more deflationary pressure to the table, in addition to the deflationary pressures already emanating from Europe. Depending on how currency markets play out in the coming months, we believe such global forces may ultimately slow the pace of Fed interest rate hikes and accelerate the dollar rally.
1 Source: Cornerstone Macro, August 11, 2015.
2 Source: Wall Street Journal, “China Acts to Devalue its Currency,” Aug. 11, 2015
3 The Special Drawing Rights’s value is currently based on a basket composed of the US dollar, the euro, the pound sterling and the Japanese yen. The IMF reviews the SDR basket valuation method every five years to ensure that it reflects the relative importance of major currencies in the world’s trading and financial systems, with the aim of enhancing the attractiveness of the SDR as a reserve asset. Source: IMF, August 4, 2015.
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